Blue-chip stocks' record one-day point gain on Tuesday came as bond prices and the dollar also rose after a report pointed to steady economic growth with little inflation ahead.
The dollar jumped against major currencies, bolstered by U.S. stocks' surge and remarks from a senior Japanese official indicating little alarm at the dollar's recent rise.
Traders said the dollar's performance helped boost U.S. bonds, which responded well to the report by the National Assn. of Purchasing Management showing its factory index fell to 56.8 in August from 58.6 a month earlier, while its prices-paid index, a measure of inflation, barely budged--rising to 53.8 from 53.6.
The report eased concern the Federal Reserve Board will raise interest rates soon to ward off inflation.
"The environment remains fairly positive for bonds--inflation is extremely well-behaved," said Lennart Carlson, who oversees $20 billion of bonds at Aeltus Investment Management in Hartford, Conn. Tuesday's manufacturing results gave the Fed no new incentive to adjust borrowing costs at a policy meeting Sept. 30, he added. Carlson hasn't bought or sold Treasuries in recent days.
The benchmark 30-year Treasury bond rose, pushing its yield down to 6.55% from 6.60% on Friday.
The Dow average jumped 257.36 points, or 3.4%, to 7,879.78, snapping out of an August slump that had taken the market down about 8%. The rise beat the 187-point jump on Oct. 21, 1987, two days after the crash. But in percentage terms it was not among the biggest gains.
Traders noted that many institutional investors, returning from the Labor Day holiday weekend, were putting cash to work at the start of the month.
The key to stocks' near-term direction could come Friday with the release of the government's report on the jobless rate in August, analysts said.
Broader stock indicators also rallied as interest rates fell.
The Standard & Poor's 500-stock list set a new point-gain record to rise 28.11 to 927.58, easily breaking a mark dating from the 1987 crash rebound.
Advancing issues outnumbered decliners by a nearly 3-to-1 margin on the New York Stock Exchange, where volume was up sharply from last week's sluggish pace, but still fairly modest.
The NYSE composite index rose 12.42 to 482.90, and the technology-heavy Nasdaq composite index rose 30.77 to 1,618.09, led by Microsoft, which rose $5 to $137.19.
The Russell 2000 list of smaller companies closed at a record high for the fourth consecutive session, advancing 4.62 to 428.05 for its seventh straight winning session.
Among Tuesday's highlights:
* The Dow's strongest components included several popular stocks that had been beaten down by profit-taking last month, including Procter & Gamble, up $4.88 to $138; Merck, up $3.88 to $95.69; General Electric, up $3.63 to $66.19; and Coca-Cola, up $2.56 to $59.88.
* Financial services companies, which enjoy a stronger lending business when interest rates aren't rising, were also prominent among the Dow's gainers: J.P. Morgan rose $4.31 to $111.81 and American Express gained $2.31 to $80.06.
The dollar's advance started in Tokyo, where it rose to a four-month high after Finance Minister Hiroshi Mitsuzuka told reporters an exchange rate of about 120 yen was appropriate, given the condition of the Japanese economy.
The dollar has risen sharply against the yen in recent weeks, hurdling 120 yen Friday, amid mounting concern about Japan's faltering economy. Many expected Japanese leaders would at least threaten to defend their currency.
In New York trading, the dollar rose to 121.47 Japanese yen from 120.80 yen late Friday and to 1.8345 German marks from 1.8090 marks.