Intel Rally Propels Dow to New High
Comforting inflation news and a spirited rally in Intel drove the Dow Jones industrial average to a new high Friday as investors dismissed what some saw as a thinly veiled warning from Federal Reserve Chairman Alan Greenspan that higher interest rates are on the way.
Technology stocks, especially shares of semiconductor makers, rallied on the heels of Intel’s announcement late Thursday that robust personal computer sales made for strong fourth-quarter earnings and bode well for the usually sluggish first quarter.
Investors also were buoyed by figures that showed a modest rise in inflation in December and the lowest annual growth rate in core consumer prices, which exclude the volatile food and energy components, in 34 years.
“What you’ve got is rising growth without inflation, which is as good as it gets for the stock market,” said Jim Paulsen, chief investment officer at Wells Capital Management.
The Dow climbed 140.55 points, or 1.2%, to close at 11,722.98, its second consecutive new high. The tech-heavy Nasdaq rose 107.06, or 2.7%, to 4,064.27 points. For the week, Nasdaq jumped 4.7%. It is now down just 0.1% for the year, after sinking almost 10% from its Jan. 3 peak of 4,131.15.
Friday’s rally came despite comments from Greenspan on Thursday night indicating that the central bank may raise interest rates when it meets Feb. 1 and 2. Once again, Greenspan expressed concern that the “wealth effect” created by a rising stock market is prompting a retail spending splurge that risks triggering inflation.
But the rally suggested that Greenspan’s strategy in recent years of “jawboning” the market down--stirring a market sell-off by hinting at a rate hike--is losing its effectiveness.
“He’s had two themes for the last five years: The stock market is going up too fast and [there may be] a stock market bubble, and the labor market’s too tight,” Paulsen said. “Now, it’s almost like the stock market is saying, ‘Here he goes again. So what?’ ”
Stocks also rallied because there’s uncertainty about how many times the Fed will raise rates this year, analysts said.
The Fed hiked rates three times in 1999, and long-term-bond rates have surged recently, which many experts say will result in a slowing of the economy later in the year.
“You hear so many conflicting arguments about interest rates,” said Brian Belski, chief investment strategist at George K. Baum & Co. “People make the argument that [long-term] bond yields already have jumped, and that’s good enough.”
Bond yields inched up again Friday, with the yield on the 30-year Treasury resting at 6.69%, up from 6.65% on Thursday.
Intel shot up $12, or 13%, to a record $103.06. Excluding acquisition charges, the chip colossus earned 69 cents a share, surpassing the highest “whisper” numbers, or unofficial estimates, on Wall Street.
Though Intel’s stock price soared 39% in 1999, that is modest compared with other highfliers such as Qualcomm and Yahoo, Belski said.
“This stock was not as extended as some of the other tech stocks, and on a valuation basis, it’s looked upon as a value play, believe it or not,” he said.
Its earnings propelled the Philadelphia semiconductor index to an 8.1% gain on the theory that chip-related companies will report similarly impressive earnings in the next few weeks.
Applied Materials soared $11.13 to $135.63, Novellus Systems jumped $12.63 to $155.44 and KLA-Tencor added $18.25 to $138. Motorola shot up $12.44 to $151 on enthusiasm that surging cellular-phone sales will help it report strong profit Monday.
On the downside, Lucent Technologies slipped $2.88 to $53.38 on speculation that the company is being investigated by the Securities and Exchange Commission over its accounting practices. The company said it was not aware of any inquiry.
Several other groups, including financial and drug stocks, also shone Friday.
Banks and brokerages rallied after the government report showing that core consumer prices picked up only 0.2% last month. Despite the hand wringing over inflation, the core rate of inflation increased 1.9% in 1999, the lowest since 1965. The overall CPI, however, rose to 2.7% last year from 1.6% in 1998.
Bank of America climbed $2.94 to $50.50, Citigroup gained $2.38 to $58, Lehman Bros. popped up $3.44 to $75.75 and American Express rose $3.50 to $159.50.
Drug makers climbed in part because investors expect more industry mergers. SmithKline Beecham added $3.31 to $70, Glaxo Wellcome advanced $2 to $60 and Warner-Lambert tacked on $1.81 to $93.69.
The rallies so far this month in interest-rate-sensitive stocks, such as banks and utilities, and consumer staples stocks, such as food and drug makers, indicate that equity investors are not worried about inflation, Paulsen said.
Consumer staples, which are products people buy regardless of how the economy performs, typically perform well even in weak economies because of their steady earnings. Investors have moved into that sector in the last couple of weeks in the belief that rising bond yields will slow the economy, thereby heading off hyper-inflation or the need for a prolonged series of rate hikes, Paulsen said.
“Last year, if you look at the winners, they were all economically sensitive stocks, and the losers were either stable growth or bond-like,” he said. “This year, it’s almost the opposite so far.”
In other markets, crude oil surged nearly 3%, hitting its highest price since the Gulf War in 1991, after Iran’s oil minister said exporters should keep production limits in place through September.
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Market Roundup, C4
