Dow Soars 257 on the Prospect of a Rate Cut
Technology, financial and oil shares soared Wednesday as Federal Reserve Board Chairman Alan Greenspan’s strong hint of an interest rate cut generated new enthusiasm for stocks, especially for cyclical companies whose fortunes are closely linked to the economy’s health.
A final-hour surge helped carry the Dow Jones industrials up 257.21 points, or 3.3%, to 8,154.41 after Greenspan indicated in Senate testimony that he would push for a rate cut at a Fed meeting Tuesday.
The Dow’s point gain was its fifth-biggest ever and coincided with huge rallies in beleaguered Latin American markets, as Brazilian shares leaped 11%.
Early today in Asia, stocks also posted heady gains, on optimism that a Fed cut could put downward pressure on interest rates worldwide.
In Tokyo, the Nikkei-225 index was up 429.35 points, or 3.1%, to 14,219.16 near midday. Hong Kong’s market was up 4.9% and Thailand’s market surged 8.3%.
On Wall Street, the market’s advance was broad and deep. Rising shares on the New York Stock Exchange outnumbered decliners by better than a 3-1 margin, and volume topped 905 million shares, also the fifth-highest ever.
High volume on an up market day demonstrates strong demand for equities and can indicate that a rally has lasting power, analysts note.
Among major indexes, the Standard & Poor’s 500 index jumped 36.46 points, or 3.5%, to 1,066.09, while the technology-heavy Nasdaq composite index roared ahead 3.7%, gaining 62.47 points to 1,760.27.
The 115 NYSE stocks making new 52-week lows exceeded the 66 notching new highs, but the margin between the two narrowed from its recent level.
“When [Greenspan] spoke, his words were a little more favorable than even the Street had hoped for,” said Anthony O’Bryan, a technical analyst at A.G. Edwards & Sons. “He certainly seems to be leaning more toward cutting rates and less [worried] about inflation. That’s all the market had hoped for and that’s what it got.”
Though a rate cut would help U.S. companies over time by lowering their borrowing costs and potentially prolonging the economic expansion, many analysts agree that the most immediate effect could be in simply boosting confidence in financial markets--where investors have been eager for government policymakers to take action to offset the deflationary pressures brought by the global economic turmoil.
A rate cut could be particularly helpful to blue-chip multinational companies that do a lot of business overseas. Lower U.S. rates could bring down the value of the dollar versus other currencies. That would boost multinationals’ earnings when foreign sales are translated into U.S. dollars.
The dollar eased against European currencies on Wednesday but rose against the Japanese yen.
Among blue-chip stocks, Coca-Cola jumped $1.63 to $58 and GE shot up $4.19 to $84.06.
Meanwhile, the Russell 2,000 small-stock index rose a respectable 2.1% on Wednesday, but it trailed the blue-chip averages.
On a bright note, however, the S&P; mid-sized stock index rose 2.8%, and since the market bottomed on Aug. 31 it has outperformed even the big-cap indexes with a 13.4% gain.
To Morgan Stanley Dean Witter investment strategist Peter Canelo, that’s a sign investors may be starting to branch out from their recent preference for large stocks.
“There is a little sign of life” among smaller issues, he said. “People aren’t going directly from large caps to small caps. [First] they’re going to trade down a little” to mid-caps.
Stocks of smaller companies, which are largely dependent on the U.S. economy, could get a further boost if investors believe that lower rates will stoke U.S. growth.
As stocks rallied, short-term Treasury yields also fell in anticipation of a Fed rate cut. But the yield on the 30-year Treasury bond rose a bit, to 5.16% from 5.15% Tuesday. Analysts say long-term rates may not decline much more, even if the Fed cuts short rates.
Among Wednesday’s highlights:
* Tech stocks led the market on optimism about the global economy. Intel jumped $3.50, or 4.2%, to $87.06; Microsoft advanced $4.44, or 4.1%, to $113.63; and Cisco Systems improved $3.38, or 5.4%, to $66.25.
* Bank and other financial stocks, which would be direct beneficiaries of an interest rate cut, rallied. Citicorp jumped $10.38, or 10.9%, to $105.50 and Travelers added $3.56, or 9.1%, to $42.94 after the Fed approved their merger.
Other winners included Chase Manhattan, up $4 to $50.13; J.P. Morgan, up $5.06 to $93.13; and NationsBank, up $4.75 to $58.75.
* Among industrial shares, Alcoa leaped $3.94 to $72.13, Caterpillar gained $3.19 to $45.31 and Phelps Dodge rose $2.50 to $52.19.
* Oil stocks scored sharp gains as five Middle East oil ministers said they wanted to keep open the option of further output cuts to boost prices. Saudi Arabia also invited major oil executives to meet to discuss “opportunities for cooperation.” Exxon soared $3.25 to $70.31 and Chevron jumped $3.63 to $84.69.
Market Roundup, D7
