U.S. stocks rose to records for a third day Wednesday as investors grew more confident that corporate profits will expand next year as interest rates fall. Shares of banks and other financial companies led the advance.
Expectations that the Federal Reserve Board will trim interest rates this month fueled optimism that the year-old rally in stocks still has room to grow.
"Investors are excited that maybe the Fed will ease, and it's always cheaper to do business when interest rates fall," said Nola Maddox Falcone, president of Evergreen Asset Management Corp., which has $5.4 billion in assets.
The Dow Jones industrial average rose 21.68 points to a record 5,199.13 in a seesaw session that saw the average rise above 5,200 for the first time. It was the 68th record this year and boosted the average's gain for the year to 35.5%.
The Standard & Poor's 500 index closed up 2.51 points at an all-time high of 620.19, after it rose as much as 3.43 points before a drop in computer stocks pared the gain. Concern grew that sales of computers may be slowing at a pivotal time of the year--about 36% of all computers are sold during the holiday season.
"People are a little worried about this Christmas season," said David Wu, an analyst at Chicago Corp. "They're selling and will ask questions later."
Among computer issues, Compaq Computer fell 5/8 to 46 7/8, Hewlett-Packard dropped 3/4 to 81, Dell Computer gave up 1 1/8 to 37 and Apple Computer fell 3/4 to 38 3/4.
The Nasdaq composite index--filled with computer-related issues--fell 4.18 points to 1,061.71, its second straight drop after registering a record of 1,069.79 points Monday. About six stocks rose for every five that fell on the New York Stock Exchange, where about 417 million shares traded. That is above the three-month daily average of 362 million.
Stocks gained as the yield on the benchmark 30-year Treasury bond fell as low as 5.95%, almost 2 percentage points lower than the bond's 7.88% yield at the start of the year and its lowest in more than two years.
Yields bounced back to end the day little changed amid concern that "too many things that have to go right are priced into the bond market," said Kevin McClintock, who heads the management of $5 billion of bonds at Dreyfus Co. in New York.
To drive bond yields lower, "the Federal Reserve has to cut interest rates this month, inflation has to remain under control, and we have to see weak holiday retail sales," McClintock said.
Investors are also expecting Congress and President Clinton to craft an accord to balance the budget by early next century, he said.
Thomas Stiles, chief investment officer of Smith Barney Mutual Funds, which manages assets of $65 billion, expects the Fed to lower interest rates when its policy-making committee meets Dec. 19, or no later than January.
Fueled by corporate earnings increases next year of as much as 10%, Stiles looks for stocks to return to 9% to 10% annually in the next three years, including reinvested dividends.
"Until there is a period of euphoria as we have had in the past, there isn't much risk to equities," he said.
Among the market highlights:
* Banks benefited from lower rate expectations Wednesday because they can borrow for less and keep more of the money they charge on loans. Among financial stocks, shares of Citicorp rose 5/8 to 72 5/8, J.P. Morgan jumped 5/8 to 81 5/8, Chemical Banking rose 1 to 62 3/8 and BankAmerica gained 1 to 68 1/2.
* The slump in technology stocks was continued by losses in the shares of companies that make products for the Internet. The Interactive Week Internet index of 37 stocks fell as much as 8.94 points to 242.93, giving back all the gains it registered during the first two days of the week. Netscape fell 9 3/4 to 161 1/4, Spyglass dropped 4 1/2 to 110 and C-Cube Microsystems shed 7 5/8 to end at 102 1/2.
* Weighing on Internet stocks, Microsoft has scheduled a conference today to discuss how it plans to make money on the Internet. Microsoft stock jumped 4 5/8 to 90 5/8.
* Hollywood Entertainment tumbled 53% or 8 5/8 to 7 3/4 after the brokerage houses Montgomery Securities and Alex Brown downgraded the stock and a Forbes magazine article questioned the company's accounting practices. The stock was trading in the 30s in September.
Overseas stock markets were mostly higher, with Tokyo, Frankfurt and Paris exchanges posting gains. But the FTSE-100 in London eased.
At the Chicago Mercantile Exchange, lumber futures closed up $10 per January contract, the daily limit, at $282.80 per thousand board feet. Traders said news during the trading session that major producer Georgia-Pacific will close 14 softwood lumber mills because of high log costs and inventories fueled the rally.
Georgia-Pacific operates a total of 27 softwood mills, which annually produce about 2.2.14 billion board feet of lumber. The firm said the mills, mostly in the Southeast, will close from Dec. 15 to Jan. 2. Its stock dropped 3/4 to 73 7/8.