Dow, Broad Markets Rally on IBM Announcement
U.S. stocks rallied as IBM unveiled chips that can handle more information faster, sparking gains in computer-related shares such as Computer Associates International.
IBM’s announcement gave investors more confidence that computer companies, one of the drivers of the seven-year bull market, will deliver robust earnings.
“We tend to find a lot of growth stories among technology companies,” said John Hickman, who manages the Stagecoach Institutional Small Cap Fund and the Stagecoach Aggressive Growth Fund, which have about $350 million in assets. Recent purchases include Intel and Nokia.
The Dow Jones industrial average, up 24% this year, climbed 79.56 points, or 1%, to 7,996.83. The Standard & Poor’s 500-stock index gained 4.92 points, or 0.52%, to 955.43. The Nasdaq composite index gained 9.10 points, or 0.54%, to 1,689.46.
IBM rose $4.56 to $103.81. Intel, which last week said it can double the power of its microprocessors, rose 94 cents to $96.38. Computer Associates rose $3.69 to $72.69.
Advancing shares outnumbered decliners on the New York Stock Exchange, 1,717 to 1,179. Trading was lighter than average at 333 million shares.
IBM said it has developed a way to use copper instead of aluminum in computer chips, allowing it to make chips that can handle information more efficiently. The first products will go in IBM’s mainframe computers, followed by processors for phone network switches and eventually for computer memory.
Semitool, which has a prototype machine for making copper chips, rose $5.69 to $24.31.
Technological changes were seen adding to the long-standing arguments that companies can maintain the robust profit growth that has fueled 20% gains in benchmark indexes for the last three years.
“There are an awful lot of opportunities out there,” said Bill Meehan, chief investment strategist at Cantor, Fitzgerald & Co. “You have a company like IBM--which many people have thought is no longer on the leading edge of technology--making some fairly important announcements.”
3Com, a maker of components that link computers, surged $2.56 to $50.38. Dell Computer, a direct-mail retailer of personal computers, gained $2.06 to $99.81.
Microsoft, the world’s largest maker of computer software, was an unusual laggard, dropping $1.88 to $133.31. Microsoft has been dogged by concerns that earnings growth is slowing as product introductions stall.
Bond yields aided the rally, hovering close to lows last seen in July amid signs of scant inflation. As yields decline, equities look more attractive. On Monday, the yield on the benchmark 30-year Treasury bond fell to 6.35% from 6.37% on Friday. It was the lowest level since July 31.
“The bond market has been a major force,” said George Jacobsen, who manages $1.3 billion as chief investment officer at Trevor Stewart Burton Jacobsen Inc.
Jacobsen said he is buying companies with “predictable earnings,” such as insurer American International Group, whose vast holdings benefit from lower interest rates. AIG rose $1 to $105.63.
Jacobsen said he will hold on to AIG even if the bond rally reverses, which he expects to happen later this year as faster growth spurs wage and price increases.
Others are looking for a further rally in bond yields.
“There is further room for long-term rates to come down,” said Cantor’s Meehan. “In the not-too-distant future, we’ll get a very healthy dose of irrational exuberance. We’ll see this market run sharply higher.”
The rally in bonds also helped the Dow industrials outpace other indexes, a trend that began last week as Merck and American Express came back into favor with investors. Those companies are seen as steady performers and often compete with bonds for investors’ attention.
American Express rose $1.19 to $81 after a report in the Wall Street Journal said it’s clawing back market share from other bank credit cards such as Visa.
Merck gained $4.31 to $102.94.
For several weeks, indexes of smaller shares such as the Russell 2,000 index had the upper hand. On Monday, the Russell rose 1.81 points, or 0.40%, to 448.98.
Meanwhile, Mexico’s market continued its recent strength as stocks soared to close at an all-time high, boosted by a sustained drop in U.S. long-term interest rates and a recent series of favorable domestic and international economic news.
The blue-chip IPC share index rose 160.60 points, or 3.14%, to close at a record 5,278.73, the highest level for the day. The Bolsa had set its previous record of 5,212.89 on Aug. 6. “We’ve had a string of good news. Basically the market is following its recent [upward] trend,” said Felix Boni, head of research for Mexico at ING-Barings, referring to the fact the market had closed higher for the fourth session in a row.
Boni said the good news included lower yields on the benchmark U.S. Treasury bond, which encouraged market forecasts that the Fed would not raise interest rates at its policymaking meeting on Sept. 30.
