FINANCIAL MARKETS : Stocks Advance on Renewed Hopes for Fed Rate Reduction
U.S. stocks posted their broadest advance in almost three weeks as investors grew optimistic that the Federal Reserve Board will lower interest rates again this year. Bank, oil and retail issues led the gains.
A slew of reports indicating economic growth is slowing fueled those expectations. Lower interest rates help stocks because corporate borrowing costs become less and economic growth is spurred.
The Fed’s policy-setting Open Market Committee is “going to give us a Christmas present” and lower rates at its December meeting, predicted Joseph Barthel, director of investment strategy at Fahnestock & Co., which manages $800 million.
The Fed last lowered the federal funds rate in July, its first cut in almost three years. If history is a guide, a second cut could spark a rally in 1996 comparable to this year’s. Since 1932, two consecutive rate cuts have sparked an average gain of 32% in stocks during the following 12 months, Barthel said.
Bond yields fell near 21-month lows after a string of economic reports showed the economy growing at a slower pace and inflation stable. The yield on 30-year Treasury bonds fell slightly, to 6.29% from 6.33% on Tuesday.
The Dow Jones industrial average rose 11.20 points to 4766.68, pushed by gains in Boeing, Procter & Gamble, Chevron and Texaco.
Gains in oil and retail shares helped boost the Standard & Poor’s 500 up 2.71 points to 584.21--more than recouping Tuesday’s losses.
The Nasdaq composite index closed at 1040.51, up 4.45 points as Intel, Cisco Systems and US Healthcare spurted higher.
As the spate of third-quarter earnings reports peters out, investors are looking to the direction of interest rates to predict profit growth. A slowdown in the economy this year has spurred concern this quarter--about 100 companies have warned investors their earnings will fall below expectations. More than 50% of the 425 companies in the S&P; 500 Index that already have reported third-quarter earnings beat Wall Street’s estimates, but 34% disappointed expectations. Last quarter, 55% exceeded expectations.
“The key point to be concerned about is earnings,” said Rick Harrington, a trader at Interstate/Johnson Lane Inc. in Charlotte, N.C. “Analysts have some very high expectations.”
The dollar, meanwhile, surged to a six-week high against the yen on Wednesday as Japanese investors sold off domestic investments and sent money overseas. In late New York trading, the dollar was trading at 103.15 yen, up from 102.06 yen on Tuesday and its highest finish since hitting 104.67 yen on Sept. 20.
Among U.S. market highlights:
* Oil companies Chevron and Texaco gained as crude oil prices climbed on a report that Gulf Coast crude stockpiles declined for a sixth consecutive week. Chevron jumped 7/8 to 47 5/8, and Texaco added 5/8 to reach 68 3/4.
* Aircraft maker Boeing climbed after the Wall Street Journal reported that Japan Air Lines plans to buy five of the company’s 777-300 twin jets for $800 million. Its shares added 2 1/2 to reach 68.
* The prospect of lower interest rates brightened banks’ earnings outlook, spurring a rebound in Citicorp, BankAmerica and Chase Manhattan, among others. That group had slumped early this week after hitting a peak two weeks ago on concerns that loan delinquencies were mounting.
* AnnTaylor Stores shares gained although the women’s clothing company said same-store sales had dropped 11% for the quarter ended Oct. 28 and that it will probably break even or have a slight profit for the period. Analysts had expected AnnTaylor to make 6 cents a share, according to a IBES International Inc. survey of 13 analysts.
The company’s shares are down 57% from their six-month high of 25 5/8 on June 22. The worst may be over, analysts said.
* Chiron’s 6-point dip to 85 cast a shadow over stocks’ gains. Analysts at Salomon Bros. and Morgan Stanley told their customers to stop buying Chiron after the biotechnology company reported disappointing third-quarter earnings.
Foreign stock markets were lower, with the Nikkei 225-share index in Tokyo losing 1.02%, Frankfurt’s DAX index down 0.22%, and the FTSE-100 in London off 0.29%. The Paris markets were closed for a holiday.
Copper prices jumped Wednesday as concern about tight supplies was exacerbated by fears that an earthquake in Chile, the world’s largest producer, would disrupt output. Traders said that copper inventories on major exchanges had already approached critically low levels. After having fallen sharply in recent weeks, copper prices have staged a turnaround because of shrinking inventories at warehouses in the United States and Europe.
