Bond Rally Propels Dow Up 126 Points
The Dow Jones industrial average soared to its second-biggest point gain ever Thursday, propelled by a powerful bond market rally and a flurry of options-related buying.
The 30-stock Dow closed up 126.87 points, or 2%, at 6,473.64, its biggest rise since the blue-chip index soared 184.86 points on Oct. 21, 1987. The powerful rally saw 26 of the 30 Dow components close higher.
“This may be the start of the Santa Claus rally,” said Richard Cripps, chief market strategist at Legg Mason Wood Walker.
For two straight sessions this week, stocks had managed to move higher despite an uncooperative bond market.
The move up was led by consumer and financial issues, as bond yields fell sharply lower on data indicating a weaker economy and strong demand at a U.S. Treasury auction of five-year notes.
“The big surprise [Thursday] was the decline in the Philly Fed survey,” said Hugh Johnson, chief investment officer at First Albany, said, referring to the report from the Philadelphia Federal Reserve saying its index of the area’s general business activity declined in December.
“That was important because it was our first look at December numbers, and it told us the economy was slower than in November,” he said.
Yield on the benchmark 30-year Treasury bond fell to 6.58% from 6.70% at Wednesday’s close.
The day’s strong gains were intensified by buying from short-coverers. These traders bet on a market decline by selling stocks bought with borrowed money. Thursday, they wound up rushing in to buy to limit losses or to lock in profits as the market rose, said Hugh Johnson, chief market strategist at First Albany Corp.
“The declines we saw the last couple of weeks, just like all the declines in the last five years, were short-lived,” Johnson said.
“It gave the bears just enough encouragement to short stocks, and, lo and behold, the mutual funds come back in and squeezed the you-know-what out of the shorts.”
Extra volatility was provided by portfolio adjustments before Friday’s scheduled expiration of stock options and futures contracts, traders said.
Advancing issues outnumbered decliners by 7 to 3 on the New York Stock Exchange. Broader stock indexes were also sharply higher, but they finished below their record highs.
The Standard & Poor’s 500-stock index rose 14.23 points to 745.77, and the NYSE composite index rose 6.99 points to 392.16. The Nasdaq composite index rose 10.48 points to 1,295.86.
The Dow barreled higher from the opening bell, rising 50 points before the first hour of trading had ended. That prompted the NYSE to impose restrictions on computer-driven trading, limits that stayed in place all day.
Stocks rose with bond prices after the government reported making a sizable upward revision in its weekly figures on first-time claims for unemployment benefits and said the nation’s trade deficit had narrowed by 30% in October to $7.99 billion.
The jobs figures calmed some jitters that the economy was growing an at inflationary pace.
In the afternoon, news of very strong demand for the Treasury auction of $12.5 billion in five-year notes prompted a doubling in the Dow’s already strong daily gains.
Among Thursday’s highlights:
* Bank and other financial shares were among the market’s leaders as bond yields declined, lowering their cost of capital.
NationsBank spurted 4 3/8 to 98 1/2, First Union gained 1 5/8 to 74 7/8, Boatmen’s Bancshares added 2 13/16 to 63 15/16 and Fifth Third Bancorp surged 3 1/4 to 65 1/2.
Citicorp gained 3 1/8 to 104 1/8, BankAmerica climbed 2 1/4 to 100 5/8, Bankers Trust New York bounded 3 3/4 to 89 5/8 and Chase Manhattan rose 3 3/8 to 90 3/4.
* Savings and loans benefited from a federal ruling this week that said some companies can recover greater damages from the U.S. government for potential profits they lost as a result of a 1989 federal accounting rule change. Golden West Financial rose 1 3/4 to 64 3/4, Glendale Federal Savings Bank climbed 1 7/8 to 23 7/8, Coast Savings Financial gained 1 1/2 to 37 1/4 and CitFed Bancorp climbed 1 1/2 to 33 3/4.
* Consumer stocks also were big winners. The top gainer on the Dow was Procter & Gamble, up 4 3/8 to 108 1/2.
* Nike gained 1 3/4 to 60 3/4 after the athletic-shoe maker reported better-than-expected fiscal second-quarter earnings.
* Technology shares were mixed. IBM fell 7/8 to 157 3/4 and Apple Computer declined 7/8 to 22 1/4. But Microsoft climbed 2 1/4 to 84 7/8, Intel rose 1 3/4 to 137 1/2 and Dell Computer advanced 1 1/2 to 58.
At the New York Mercantile Exchange, crude oil prices set a new post-Gulf War high for a second straight day, with January crude closing up 41 cents a barrel at $26.57.
In overseas trading, Tokyo’s Nikkei index declined 2.6% amid mounting concerns about the sluggish Japanese economy. Frankfurt’s DAX index fell 0.46%, and London’s FTSE-100 gained 0.82%.
* TRADE GAP NARROWS
Record exports helped the U.S. trade deficit decline $30.2% in October. D3
