Dow Soars 126 Points in Blue-Chip Pile-On
The bull market reasserted itself in a big way Thursday, as a rush to buy blue-chip stocks drove the Dow Jones industrial average up 126.87 points, or 2%, to 6,473.64.
The broad market also rallied, though not as powerfully as the Dow, which had suffered a bout of profit-taking over the last two weeks after surging in November.
Analysts said the Dow’s rise drew strength from falling bond yields, profit optimism from General Electric and drug giant Merck, and technical trading related to today’s quarterly expiration of key stock option and index options contracts.
Some also cited the traditionally sunny market tone around Christmas. “This may be the start of the ‘Santa Claus rally,’ ” said Richard Cripps, chief market strategist at Legg Mason Wood Walker.
The Dow’s point gain was second only to the 184.86-point rise of Oct. 21, 1987, two days after the 1987 market crash. But with the Dow at its current lofty level, large point gains don’t mean nearly what they used to. In percentage terms the rise of 2%, while certainly noteworthy, was far from record territory.
The markets started the day strong, as fresh economic data suggested growth continues to slow. “The big surprise [Thursday] was the decline in the Philly Fed survey,” said Hugh Johnson, chief investment officer at First Albany, referring to the Philadelphia Federal Reserve’s report that its index of area business activity declined in December.
The report, one of the first bits of official data on the U.S. economy’s trend in December, helped push down bond yields, which had been climbing in recent days to the highest levels since late October.
The yield on the bellwether 30-year Treasury bond dove to 6.58% from 6.70% on Wednesday. The Treasury also enjoyed healthy demand at its auction of new five-year notes, selling the notes at an average yield of 6.165%, below expectations.
The Fed report “gave you a reason to buy” bonds, said Robert McCool, a trader at First Chicago Capital Markets.
That, in turn, helped stoke stocks, many of which had been clipped by profit-taking in recent weeks, after the Dow reached its record high of 6,547.79 on Nov. 25.
Blue-chip shares, in particular, also were boosted Thursday by technical trading, as traders who had entered into complex transactions involving stocks and stock option and futures contracts were faced with the need to square positions ahead of the contracts’ regular expirations today.
In the broad market, the New York Stock Exchange composite index rose 1.8%, and Big Board winners topped losers by 18 to 9 in heavy trading.
But smaller stocks, which had begun to reassert themselves in recent weeks, again took a back seat to blue chips. The Russell 2,000 index of smaller stocks rose 0.9%, less than half the Dow’s gain.
Analysts noted that two big blue-chip companies--GE and Merck--in recent days have issued bullish outlooks for 1997 earnings. GE said Thursday that it will split its stock 2 for 1, and it also raised its dividend 13%. Merck on Wednesday advised analysts that it sees 1997 earnings near the top of their estimate range.
Also Thursday, Coca-Cola predicted its fourth-quarter worldwide unit case volumes will rise a strong 10%.
Not surprisingly, those three stocks drove the Dow. GE shot up 3 1/2 to 102 3/4, Merck rocketed 4 3/8 to 81 1/4 and Coke leaped 2 3/4 to 51 1/8.
With big companies so glowingly optimistic about their outlooks, “as long as you have a stable economic background--it doesn’t have to be better, it just has to be stable--the market’s going to do better,” said Philip Roth, analyst at Dean Witter Reynolds.
Among Thursday’s highlights:
* Other blue-chip winners included Alcoa, up 2 to 62 7/8; Exxon, up 2 3/8 to 99 5/8; Procter & Gamble, up 4 1/8 to 108 1/4; and United Technologies, up 2 5/8 to 67.
But General Motors eased 1/8 to 54 3/8. The company told analysts it expects to earn about 60 cents a share this quarter, down from their forecasts of about 99 cents, because it is spending heavily to launch new models.
* Bank and other financial shares were among the market’s leaders as bond yields declined. NationsBank spurted 4 3/8 to 98 1/2, First Union gained 1 5/8 to 74 7/8 and BankAmerica rose 2 1/4 to 100 5/8.
* 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 surged 1 7/8 to 23 7/8, Coast Savings gained 1 1/2 to 37 1/4 and CitFed Bancorp climbed 1 1/2 to 33 3/4.
* Many tech shares, big gainers on Wednesday, took a breather. IBM fell 1/2 to 158 1/8 and Apple declined 7/8 to 22 1/4.
Stocks and bonds ignored another jump in oil prices. At the New York Merc, crude oil futures set a new post-Gulf War high for a second straight day, with January crude up 41 cents to $26.57 a barrel.
* TRADE GAP NARROWS
Record exports helped the U.S. trade deficit decline $30.2% in October. D3
