Dow Soars 173, Biggest Point Gain Since ’87
In a stunning rebound, blue-chip stocks rocketed Tuesday amid surprisingly strong corporate earnings reports and falling interest rates.
The Dow Jones industrial average soared 173.38 points, or 2.6%, to 6,833.59, erasing much of the decline that had pulled the index down nearly 10% since March 11--and sparking fresh debate about the 6 1/2-year-old bull market’s longevity.
Some analysts noted that the market’s advance was driven by a relative handful of well-known stocks, while many small-company stocks continued to decline--a split performance that suggests Wall Street’s recent pullback may not have run its course, they said.
Others warned that it is often a mistake to ignore strength in the market’s leading stocks, which is the role blue-chip issues have played since 1993.
Tuesday’s rise in the 30-stock Dow index was the second-largest point gain ever. The biggest advance, in points, was the 187-point leap of Oct. 21, 1987, two days after the Black Monday market crash.
In percentage terms, Tuesday’s Dow jump also was impressive--the biggest since 1991.
After falling nearly 10% from its record high of 7,085.16 on March 11 to 6,391.69 on April 11, the Dow now has rebounded 6.9%, and stands just 252 points, or 3.6%, below its peak.
Analysts said a string of robust first-quarter earnings reports from such companies as consumer products giant 3M Co., drug firm Bristol-Myers Squibb Co. and United Air Lines parent UAL Corp. helped fuel the buying on Tuesday. Healthy earnings provide a fundamental underpinning for stocks.
In addition, long-term interest rates fell to their lowest level since March 26, with the yield on the bellwether 30-year Treasury bond slipping to 7.04% from 7.09% on Monday. Rising rates had been one of the main catalysts behind stocks’ recent slump.
The rally also was stoked in part by the cash received by mutual funds last week, as individual investors met the April 15 deadline to fund their 1996 individual retirement accounts, analysts said.
But smaller-company stocks barely participated in the rally, continuing what has been a tale of two markets, in which the big, presumably safer, blue-chip names prosper and smaller, more obscure stocks find little support from investors.
At the mutual-fund level, “the flow of new money . . . continues to go primarily into conservative ‘growth-and-income’ funds,” said Charles Biderman, head of Liquidity Trim Tabs, a fund-tracking newsletter in Santa Rosa, Calif.
By contrast, investors have on balance been pulling money out of mutual funds that focus on smaller, more speculative stocks, many mutual fund companies say. That has exacerbated the decline in those stocks.
The Russell 2,000 index of small-company stocks, for example, has actually lost a bit of ground during the same seven trading sessions in which the Dow has added 442 points. The Russell index slipped 0.18 point to 338.09 on Tuesday.
The Nasdaq composite index, heavily weighted with technology stocks, inched up just 8.79 points to 1,212.74 on Tuesday, and remains off 12.6% from its January record high. Technology stocks have suffered as much as any market sector from investor concerns about slowing corporate earnings growth and higher interest rates.
Hence, despite the Dow’s strength, “this is not a broad-based rally,” said Philip Orlando, chief investment officer of Value Line Asset Management in New York, who remains convinced that the Dow will soon retreat to the 6,200 to 6,300 level, pulled down by the rest of the market.
As recently as April 11, analysts note, the Dow suffered a 148-point plunge on signs that the economy is growing rapidly, fanning inflation concerns.
One of investors’ biggest worries is that the Federal Reserve Board will be compelled to raise interest rates further, to slow the hot U.S. economy. The Fed raised its benchmark short-term interest rate from 5.25% to 5.5% on March 25, the first increase in more than two years. Orlando and many other analysts believe there is a strong likelihood that the Fed will raise rates again in late May.
Most of the Dow’s loss occurred in the wake of the Fed’s move on March 25. Higher interest rates and tighter credit can be ruinous for stock bull markets by raising the cost of doing business and depressing economic activity.
By historical standards the Fed-induced market slide was harrowingly rapid. The Dow fell for five consecutive weeks through April 11, bottoming on that day at 6,391.69--down 9.8% from its peak.
Smaller stocks have suffered far worse than the blue-chip Dow. A recent study by brokerage A.G. Edwards & Sons Inc. in St. Louis found that the average stock traded on the Nasdaq market, home of most smaller issues, was down 38% from its 52-week high.
In Wall Street parlance, a decline of 10% to 20% in key market indexes is considered to be a “correction” in prices, a temporary pullback within the context of a bull market advance.
A decline of 20% or more in key indexes is usually deemed a “bear” market, a deep and sustained drop in stock prices that historically has frightened many investors out of the market for extended periods.
Now, the wide disparity in performance between large, blue-chip stocks and smaller stocks is leaving many analysts unsure what to call the current market phase.
Some say Wall Street is in the grip of a “stealth” bear market, one in which the many investors see significant damage to their portfolios, but that damage is masked by strength in a relative handful of big-name stocks--the Microsofts, General Electrics and Coca-Colas of the corporate world.
With Tuesday’s huge rally in those select blue-chip names, while falling stocks actually outnumbered winners in the beleaguered Nasdaq market, some analysts said stocks’ general outlook remains worrisome.
“It’s a dangerous rally because it could trap some people into thinking that we’re back to nirvana, when that is not the case,” said Ned Riley, investment chief at the Bank of Boston’s Private Bank.
Moreover, with the Dow nearing its record high, “at these levels it’s getting to the point where it won’t take much to make people nervous again,” said Jerry H. Dombcik, chief stock strategist for McDonald & Co. Securities in Cleveland.
But other analysts note that blue chips have been leading Wall Street for several years, and that a continuing rally in those stocks could revitalize the entire market.
“It wouldn’t be the first time that has happened,” said Dennis Jarrett, head of Jarrett Investment Research in Westport, Conn. “The more doubting Thomases there are, the greater the likelihood that that could occur.”
He noted that the market’s strength over the past 10 days hasn’t just been concentrated in a handful of blue-chip names, but in fact has included such stock groups as airlines, truckers and heavy-industrial companies--all of which would benefit from a continuing economic expansion.
James Solloway, research chief at Argus Research in New York, said that even though the threat of further Fed interest rate hikes could keep a lid on stock prices in the near term, “there are no major signs that the Fed will have to tighten credit so severely so as to precipitate a recession.”
And if more investors in the months ahead begin to look past the short-term trend in interest rates and focus on the benefits of a longer economic expansion--including ongoing earnings growth--”I think we’ll see new highs in stocks before we see a bear market,” Solloway said.
Mulligan reported from New York and Petruno from Los Angeles.
* EARNINGS GAINS: Blue-chip companies are posting surprisingly strong results, Tom Petruno notes. D6
