Dow Jumps 143 Points, Shatters Record High

NEW YORK — In an emotional return to all-out bullishness, investors stormed the stock market Monday, smashing the Dow Jones industrial average’s all-time record and pushing long-overlooked smaller-company stocks even more sharply upward.

The widely watched Dow average leaped 143.29 points--its fourth-biggest one-day gain--to finish at a record 7,214.49, completely wiping away an early spring stock-market “correction” during which the Dow had lost 9.8%.

The Nasdaq stock market, loaded with technology stocks and smaller-company issues that have plummeted in recent months, continued roaring back Monday in its second-busiest trading day ever. The Nasdaq composite index leaped 2.6% Monday on top of a 2.7% gain on Friday.

“We’re in a panic melt-up. If you don’t own stocks--big or small--you’re scrambling to get in,” said Scott Bleier, chief investment strategist at Prime Charter.

International markets followed Wall Street’s lead, and the rally marched around the globe.

The Dow’s previous closing high was 7,085.16 on March 11. After that peak, the index lost nearly 700 points in a month, prompting fears that the long bull market was at an end.

From those doldrums of just three weeks ago, market sentiment has turned completely around for several main reasons, analysts say:

* Congress is about to rain manna on stock investors in the form of a cut in the capital-gains tax rate, from the current 28% to perhaps as low as 19.8%. Investors thinking of taking profits are now refusing to sell their stocks until the rate drops. That makes shares harder to come by and drives prices upward.

“Corporate insiders were on strike today. They’re not selling,” said David Shulman, market strategist for Salomon Bros.

* Smaller stocks, which were hit much harder than the big blue-chip issues during the April downturn, suddenly look like screaming bargains.

Wall Street money managers, always afraid of getting left behind in a rally, rushed to buy practically whatever was available--a major turnaround from recent weeks, when skittish buyers chose only the safest-possible stocks.

* A low-inflation economy and the pending balanced-budget deal between Republicans and Democrats may keep the Federal Reserve Board from raising interest rates again. According to Business Week magazine, Fed Chairman Alan Greenspan has told confidants he will not push for a rate hike when the board meets May 20.

Senate Majority Leader Trent Lott (R-Miss.) also turned up the political heat on the Fed chief Monday, saying that there should be a payoff for the long-sought budget agreement.

“The overall indication [from Greenspan] has been that if we would take action on the budget, it would be viewed positively by the Federal Reserve Board,” Lott told the Economic Club of Chicago, adding afterward: “I’ve never met an interest rate hike that I liked.”

Investors may also have been encouraged by legendary investor Warren E. Buffett, chairman of Berkshire Hathaway Inc., who told Bloomberg News over the weekend that U.S. stocks were “fairly valued.”

Buffett went on to tell investors at his company’s annual meeting in Omaha on Monday that it is hard to find bargains and therefore he isn’t buying now. Nevertheless, his statements were taken as more bullish than those of last winter, when he said stocks--including his own company’s--looked overvalued.

Whatever the source of the enthusiasm Monday, it was most keenly felt on the Nasdaq market, which lost 13.5% of its value in a sell-off that stretched from January into April.

“Nasdaq had lagged so far [behind the Dow] that the divergence just couldn’t last,” said money manager Suzanne Zak of Zak Capital in Minneapolis.

“A lot of companies with really good prospects were trading down just in sympathy with the rest of the market,” she said. “They were giving these things away.”

Leading the Nasdaq market higher over the last week has been the revived technology sector, which suffered more damage during the recent correction than any other industry group. Amid the correction, the Nasdaq computer index was as much as 18% below its Jan. 22 all-time high. On Monday, the computer index rose 2.8% and now stands 1% below its peak.

“Most of the small-cap tech stocks have hit a bottom,” said Tony Dwyer, chief investment strategist at Rickel & Associates. While many of the group’s stocks have rebounded with a vengeance, the sector, he said, “is nowhere near overbought levels.”

As a result, he added, the rally by computer-related stocks “will continue for a while longer.”

But that feeling is by no means universal.

Several things could bring the rally to a quick halt, experts warned.

Among the Nasdaq stocks, “first-quarter [corporate] earnings growth was not that great,” said Claudia Mott, director of small-capitalization stock research at Prudential Securities. “Unless we get strong earnings in the second quarter, this [rally] may not last long.”

Paradoxically, the capital gains tax cut--a friend to stock investors in the long run because it lets them keep more of their stock appreciation--could cause a short-term downturn when it takes effect, Salomon’s Shulman said, as people who have large gains on paper may want to quickly lock them in by selling.

“There was a big sell-off in 1978, and 1981 was a bear market,” Shulman said, ticking off the last two times when the tax rate was lowered.

As ever, the Fed remains a wild card. Last week, investors seemed to focus only on the economic news that cheered them, such as a report that wage and benefit costs had risen less than expected in the first quarter.

The markets stampeded right past data showing a tight labor market and surging growth in the overall economy--both signals that might cause the Fed to tighten further.

If investors sense a Fed rate hike, it could cause the recent ebullience to disappear, analysts said.

* INVESTOR BENEFIT: Issues to consider with possible capital gains tax cut. D1

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Big Gains (Orange County Edition, A13)

Here are the 10 Orange County companies that made the largest percentage gain in stock prices Monday:

Company: Percent gain

Boyds Wheels: 17.5%

CKE Restaurants: 14.6%

Cardiovascular Dynamics: 14.3%

Biopsys Medical: 13.8%

AmeriQuest: 11.1%

STM Wireless: 10.3%

Wet Seal: 10.2%

Simulation Sciences: 8.9%

Cocensys: 8.7%

ATL Products: 8.6%

Source: Bloomberg News