Fed Inaction Rouses Buyers; Dow Gains 39
The stock market closed mixed Tuesday but improved from morning levels, as the Federal Reserve Board met investors’ expectations by leaving interest rates unchanged.
The Dow Jones industrials rose 39.98 points to 6,308.33, in the first significant rally since Dec. 9.
In the broad market, most major indexes were modestly higher. But losers still outnumbered winners on both the New York Stock Exchange and the Nasdaq market, in heavy trading.
Stocks’ finish was nonetheless impressive, given that yields in the bond market rose despite the Fed’s decision to leave interest rates alone. Analysts said bond investors were riled by economic data Tuesday showing a strong construction market in November.
What’s more, a heavy new supply of bonds hits the market today and Thursday, as the Treasury auctions new two- and five-year notes.
Facing supply pressures and growing suspicions that the economy is advancing faster than the Fed ultimately will permit, traders pushed the yield on the bellwether 30-year Treasury bond from 6.62% on Monday to 6.65% on Tuesday, highest since Nov. 5.
Oddly, shorter-term yields were up sharply, with the yield on six-month T-bills jumping to 5.28% from 5.22% on Monday.
On Wall Street, however, “The old leaders are reasserting themselves,” said Joseph Battipaglia, chief investment officer at Gruntal & Co., reviewing the stocks that led Tuesday’s modest rally, including IBM, up 3 1/4 to 151 7/8, and J.P. Morgan, up 2 5/8 to 97 3/8.
With the Dow’s losses exceeding 200 points over the last four sessions as investors cashed in profits from last month’s gains, analysts said some stocks were starting to look like bargains.
Even so, the mood on Wall Street was far from exuberant. For the second straight session, a major investment firm--this time Merrill Lynch--voiced caution on the stock market’s outlook.
At a news briefing, top strategists at Merrill predicted that investors might earn more in bonds than in stocks in 1997. Merrill chief economist Donald Straszheim said the firm expects operating earnings for the Standard & Poor’s index of 500 blue-chip stocks to rise only 2.5% in 1997, compared with an expected rise of 6.1% this year.
On Monday, Morgan Stanley & Co.’s chief strategist warned that stocks are vulnerable to a much sharper pullback soon.
Among Tuesday’s highlights:
* GE helped boost the Dow, climbing 2 1/2 to 97 5/8, a day after Chairman John Welch briefed analysts on the company’s outlook. Analysts who attended the meeting described the talk as upbeat.
* Bank stocks were broadly higher. NationsBank rose 3 to 95 1/4, Wells Fargo gained 7 3/4 to 270 1/4 and Bank of Boston rose 1 7/8 to 63 5/8.
* Tech issues were mixed after slumping Monday on worries about personal computer sales. Intel rebounded 2 3/4 to 130 and Microsoft rose 3 1/8 to 79 7/8, but Compaq slid 3 1/8 to 72 1/4 and Micron Technology lost 2 1/2 to 32 1/4. Micron reported lower quarterly earnings.
* Telecommunications firm Frontier plummeted 5 5/8 to 20 3/4 after warning that its fourth-quarter earnings will be below year-ago levels.
In foreign trading, Mexican shares staged a brisk rally, with the Bolsa index soaring 2.5% to 3,253.97. Analysts cited relief that the Fed didn’t raise interest rates. Brazilian shares also rallied, with the Bovespa index up 2%.
