FINANCIAL MARKETS : Dow Leaps 50 Despite Lack of Action by Fed : Markets: Technical factors boost blue chips as central bank holds rates steady. Treasury taps trust funds to stay solvent.
The stock market brushed off the Federal Reserve Board’s decision to hold the line on interest rates on Wednesday, as technical trading strategies drove the Dow Jones industrial average to another record high--and closer to the 5,000 mark.
The Dow surged 50.94 points to 4,922.75 in a late rally, although most broader stock indexes rose only modestly.
Meanwhile, bond yields inched up as traders reacted to the Fed’s meeting and to the first in a series of longer-term Treasury security auctions planned for the next week, as Treasury Secretary Robert E. Rubin raises cash to keep the government solvent amid political squabbling.
Rubin, as expected, announced Wednesday that he has tapped two civil-service trust funds in order to provide the Treasury with needed borrowing power, as the impasse between President Clinton and Congress over the federal debt ceiling and the budget continues.
On Wall Street analysts said much of Wednesday’s focus was on the Fed, which met in Washington and adjourned without changing short-term interest rates.
Although most economists had expected the Fed to stand pat at this meeting, there is strong conviction among many investors that the central bank will lower rates a notch at its Dec. 19 meeting.
A Fed cut is anticipated because of generally sluggish growth in the U.S. economy, and because investors expect that President Clinton and Congress will by mid-December have reached agreement on a long-term balanced budget plan.
That optimism has helped support the stock market’s advance in recent months, analysts note, because lower interest rates are almost always bullish for stocks.
But Wednesday’s sharp gain in the Dow index was viewed as more of a mechanical reaction to certain strategies used by short-term traders, experts said.
The market was relatively flat for much of the day but shot up in the last hour on a flurry of computerized “program” buying linked, in part, to Friday’s monthly expiration of option contracts on some individual stocks and certain stock index futures.
As option and futures bets expire traders must roll-over their positions or close them out. In either case that can lead to short-term volatility in big-name stocks.
Larry Wachtel, analyst at Prudential Securities, said some “short” sellers who have bet on a declining stock market got nervous on Wednesday as stocks failed to slump despite the ongoing political war in Washington. As the shorts covered their bets, buying stocks in the open market, they helped pump-up prices, he said.
But the broad market was much weaker than the Dow’s gain suggested. Rising issues outnumbered losers by just 1,194 to 1,060 on the New York Stock Exchange, and losers had an 18-to-16 edge on the Nasdaq market.
Even so, the Standard & Poor’s 500-stock index joined the Dow at a record, adding 4.67 points to 593.96. The NYSE composite index also hit a record, gaining 2.01 points to 316.47.
The bond market, however, failed to rally with stocks.
Treasury Secretary Rubin said he converted $61.3 billion in government securities held in two federal employee trust funds into cash as part of a financial juggling act needed to avert a first-ever default on the nation’s debt.
By shifting the securities to cash, Rubin creates new borrowing power for the Treasury, which has exhausted the $4.9-trillion borrowing limit authorized by Congress. Clinton and congressional Republicans have failed to reach agreement on a higher debt ceiling, forcing Rubin to take extraordinary actions to raise fresh cash and pay off maturing debt.
“We are not going to break our word [to investors] and we are not going to default,” Rubin said. He said Wednesday’s actions will ensure the government can meet its financial obligations through the end of December.
As part of Rubin’s cash-raising plan, the Treasury on Wednesday sold $18.87 billion in one-year bills at an average yield of 5.45%.
With a heavy calendar of bond offerings ahead, some traders sold on Wednesday, pushing market yields higher. The 2-year T-note rose to 5.52% from 5.45% Tuesday. The 30-year T-bond edged up to 6.29% from 6.28%.
Analysts said some bond sellers may have been reflecting disappointment that the Fed didn’t surprise with a rate cut, or that October consumer price inflation was above expectations.
Among Wednesday’s highlights:
* The Dow was powered by Procter & Gamble, up 3 1/2 to 86 7/8; Philip Morris, up 1 3/4 to 89 5/8; GM, up 1 3/8 to 46 5/8, and Boeing, up 2 1/2 to 74.
* Consumer growth stocks in general were sharply higher, as some investors searched for companies that tend to offer stable earnings growth in uncertain economic times. Eli Lilly surged 2 1/2 to 99 1/2, Campbell Soup jumped 1 3/4 to 53, Pepsico added 1 1/8 to 54 and Avon gained 1 1/8 to 72 1/8.
* On the downside, many technology issues remained weak. And paper stocks slumped on fears of weakening paper prices. Bowater fell 2 7/8 to 40 1/2, Georgia-Pacific shed 2 5/8 to 73 3/8 and Consolidated Papers dropped 4 1/4 to 61.
* CPI CLIMBS
Consumer prices climb 0.3%, the fastest clip in five months. D2
