Blue Chips Soar on Hopes That Rates, Inflation Won’t
The Dow Jones industrial average approached its all-time high Monday as part of a blue-chip advance as many investors appeared to bet that inflation will remain mild and company earnings will continue to increase.
Analysts said Monday’s rally was a continuation of Friday’s, when a government employment report showed the economy spawned 250,000 new jobs last month. “Business is stronger with the employment report,” said Stanton J. Feeley, chief investment officer at SunAmerica Asset Management.
As higher interest rates slow the economy next year, companies won’t find it as easy to increase profits, Feeley said. Still, he predicted earnings could climb as much as 10% in 1997, close to this year’s pace.
The rosy outlook comes as the Dow is on track to show an annual gain for the sixth straight year, an unprecedented feat if achieved.
The Dow industrials rose 73.98 points to 5,733.84, moving within 50 points, or less than 1%, of the all-time high of 5,778.00 points, reached May 22. The average has risen 2.3% in two trading sessions.
In the broader market, the Standard & Poor’s 500 index gained 8.08 points, or 1.2%, to 663.76. It was the best two-day gain for both the S&P; and the Dow industrials since Aug. 1 and 2. Interest-sensitive bank shares paced the S&P; 500’s rise.
But smaller stocks trailed. The Nasdaq composite index rose less in percentage terms, up 9.32 points, or 0.8%, to 1,148.71.
But analysts said the market’s advance was exaggerated by the day’s slim trading. About 311 million shares changed hands on the New York Stock Exchange, fewer than the three-month average volume of about 376 million.
“The volume wasn’t a blowout like the move in the Dow would tend to suggest,” said A. Marshall Acuff Jr., market strategist at Smith Barney. He said Friday’s surprisingly strong rally might have been expected to draw some early profit taking Monday. “The market didn’t sell off and people took heart from that. If you’re going to have a couple of good weeks, nobody wants to miss it.”
Investors were also cheered Monday by the bond market’s continuing resilience against the recent stream of signals about the economy--data that many have seen as indicators of inflation. The figures in the employment report released Friday fell within expectations. That has helped many observers conclude that if the Federal Reserve Board moves to slow the economy by increasing its lending rates, it would not raise them to an extent that would choke off corporate profits.
The yield of the Treasury’s main 30-year bond fell to 7.06% from 7.10% late Friday.
“The fears about rising interest rates have somewhat waned. That’s adding stability to the market,” said Hildegard Zagorski, a market analyst at Prudential Securities. “The consensus is that the Fed will raise rates, but that’s already factored into the market.”
Higher inflation makes existing fixed-income investments such as bonds less valuable. Higher interest rates can hurt stocks by slowing consumer spending and raising corporate operating costs.
Analysts said the market will be closely watching the inflation barometers to be released this week, especially the August producer prices index, due Thursday, and the consumer price index, due Friday.
Among Monday’s highlights:
* The Dow’s biggest gainers were cyclical issues, which have the most to gain under the robust economic conditions suggested by the latest data. United Technologies surged 3 1/2 to 115 3/4, IBM rose 2 1/8 to 117 5/8, Union Carbide rose 1 7/8 to 45 1/8 and Caterpillar rose 1 3/4 to 73 1/2.
* Gold mining stocks fell as inflation fears ebbed and on news that the International Monetary Fund may approve this week the sale of 5 million ounces of IMF gold. Newmont Gold lost 1 3/4 to 52 1/2.
* Oil stocks, which have been supported by U.S.-Iraq tensions, have quieted down. Chevron rose 1/8 to 60 3/8, Texaco added 1/2 to 93 1/2 and Exxon inched up 1/4 to 84 1/4.
* There was a spate of merger announcements. Drug chain Big B climbed 3 1/4 to 15 7/8 and became the most actively traded Nasdaq issue after it was announced that rival Revco had made a hostile $15-a-share offer for it. Revco lost 1/8 to 25 1/2.
Drugstore chain Phar-Mor and discount merchandiser ShopKo Stores announced plans to combine. Phar-Mor lost 3/4 to 7 3/8 and ShopKo lost 1/8 to 16 1/8.
* SGS-Thomson Microelectronics surged 4 to 43 7/8 in U.S. trading on news that it has developed an integrated circuit that protects digital video systems from people who illegally copy music and other material.
Overseas, Tokyo’s Nikkei stock average rose 0.2%, Frankfurt’s DAX index rose 1.3% and London’s FTSE-100 rose 0.5%.
The dollar advanced to a two-month high against the German mark after Germany’s central bank president said major nations support a higher dollar.
The dollar was carried up to 1.5010 marks, its highest level since July 16, as the mark also fell against the French franc and Italian lira. In late trading, the dollar was at 1.5003 marks, up from 1.4920 late Friday and 109.25 yen, little changed from 109.28.
Market Roundup, D8
