Inflation News Propels Dow to 179-Point Gain
Favorable inflation news sparked a massive stock and bond rally Tuesday that brought the Dow Jones industrial average close to a new all-time high, as investors signaled a growing belief that the Federal Reserve Board may be through raising interest rates.
Yet the market remains skittish and analysts warned that Tuesday’s gains could quickly evaporate if upcoming reports show unexpected strength in the economy, which could reignite fears of higher inflation and rising interest rates. Many economists are skeptical that a real slowdown is in progress.
The Dow soared 179.01 points--its second-biggest one-day point gain ever, trumping a 173-point leap last Tuesday. In percentage terms, the 2.6% increase is the largest in 5 1/2 years. The Dow closed at 6,962.03, just 1.7% below its record high of 7,085.16 set on March 11.
The Dow now has recovered nearly all the nearly 700 points, or almost 10%, it lost in the month after the record was set.
Unlike last week’s almost freakish Dow rally, however, Tuesday’s surge was based on something tangible: a government report showing that Americans’ wages and benefits rose a modest 0.6% in the first quarter.
With employee compensation costs remaining moderate, experts said, the Fed’s Open Market Committee may see little reason to raise rates again when it meets May 20. The Fed’s increase of its key short-term interest rate from 5.25% to 5.5% on March 25--the first increase in more than two years--helped trigger major stock market declines.
“If I am a Federal Reserve official, I’d say this gives us some breathing room,” said Roger Brinner, chief economist at DRI/McGraw-Hill Inc., a forecasting firm in Lexington, Mass.
“I think the Fed will wait until July” to consider whether to boost rates, he added.
Stocks and bonds have been pummeled in recent months by concerns that the Fed could be compelled to raise rates significantly to slow the accelerating economy and to keep inflationary wage and price pressures at bay.
But if wage inflation is under control and economic growth shows signs of slowing, the central bank might not need to push rates much higher, or no higher at all, economists say.
That could draw nervous investors back to stocks and bonds.
On Tuesday, with those factors apparently at work, buyers poured back into the bond market, sending prices up and yields--which move in the opposite direction--down sharply. The yield on the 30-year Treasury bond, a benchmark for long-term interest rates in the economy, tumbled to 6.98% from 7.11% on Monday, the first time it has fallen below 7% since March 26.
That drop was particularly significant because some money managers use the 7% mark as a signal to switch assets from bonds into stocks, analysts said.
Thus, as the bond market rallied, the stock market exploded. Shares of banks and other financial-services firms--especially sensitive to interest rates--led the rally. BankAmerica Corp., for example, jumped $4.50 to $115.25; Merrill Lynch gained $5.50 to $94.875; and American Insurance Group soared $5.625 to $126.875, all in trading on the New York Stock Exchange.
Big, well-known companies that have shown strong earnings growth also did well among investors Tuesday. PepsiCo, the most active U.S. stock Tuesday, gained $3.125 to $34.375 on the NYSE after reporting stronger-than-expected quarterly earnings.
IBM, which announced a $3.5-billion stock buyback Tuesday, leaped $8 to $158.375. Other big technology stocks also posted strong gains, including Microsoft, up $4.125 to $119, and Intel, up $3.625 to $150, both on the Nasdaq stock market.
But Tuesday’s rally, in a change from recent weeks, was not tightly restricted to blue-chip stocks. On the NYSE, gaining issues outnumbered losers by nearly a 4-to-1 margin, with 2,117 up, 555 down, and 664 unchanged. And the technology-heavy Nasdaq index was up 25.6 points, or 2.1%, to 1242.63, its highest level in three weeks, as some smaller-company stocks finally began to show some spark.
The Nasdaq market has suffered a much deeper decline than the blue-chip Dow index this year, and many smaller stocks have plummeted 30% or more from their peaks.
“We’re finding more value in the mid-caps [mid-sized company stocks] than in the blue chips right now,” said money manager Steven Check of Check Capital Management in Costa Mesa. In early March, just before the Dow hit its peak, Check abandoned his bullish stance for the first time in several years.
But after the sharp drop of recent weeks, he is calling himself a “weak bull.”
In addition to the employment-cost index, two other reports Tuesday helped persuade the markets that the economy is not overheating. The government said orders to factories for durable goods unexpectedly fell by 3% in March, and a private survey showed that consumer confidence fell for a second straight month.
Still, many economists warned that the barrage of data that will hit the market today, Thursday and Friday could paint a picture of a still-strong economy. Robust data could convince the Fed to raise short-term rates another quarter-point on May 20 as “insurance” that the economy’s pace will definitely slow, some experts said.
“I don’t think there’s any evidence [yet] that we’re slowing down,” said John Williams, economist at Bankers Trust in New York. “Consumer spending seems to have a tremendous amount of momentum” so far this year, he said, and such spending accounts for two-thirds of the nation’s economic activity.
Williams also noted that many economists were puzzled by the small rise in employee-benefit costs in the first-quarter employment cost index because anecdotal evidence suggests benefit costs are rising at a much faster pace--especially for health-care coverage.
In any case, he said, “Inflation is a lagging indicator”--meaning that it often does not begin to accelerate until well after the economy picks up speed. Thus, he said, the more important numbers for the Fed, and for investors, are those that will show the level of economic activity in April and May.
Two especially important reports are the initial estimate of first-quarter gross domestic product, due today, and the April employment figures to be announced Friday. Some analysts feared a “whipsaw” effect--a sharp downturn--if the numbers turn out stronger than expected.
“I’m telling investors that there’s no need to rush into the [stock] market right now,” said Richard Cripps, market strategist at Legg Mason in Baltimore. “The market is obviously very volatile. If we bounce back up to 7.10% on the [30-year bond], there could be more carnage.”
“We really don’t have any confidence that this is going to be a long-lasting new leg of the bull market,” said Richard McCabe, a technical market analyst for Merrill Lynch. Noting that the Dow has already had nine days this year marked by gains or losses of more than 100 points, he said such sharp fibrillations are typical of a market top. He predicted that the Dow would retreat to 6,400, or perhaps lower, before recovering in the summer.
The Dow’s record single-day advance of 186.89 points came Oct. 21, 1987, two days after the Black Monday market crash.
Times staff writer Tom Petruno in New York contributed to this story.
* MIXED SIGNALS: The economy is in transition, but to what? D1
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Dow’s Wild April Ride
April low: 6391.69
Tuesday’s close: 6962.03, up 179.01
