Broad Rally Sends Dow Above 11,000
The stock market’s reaction to the Federal Reserve’s latest interest rate cut turned out to be a day late, but it definitely wasn’t a dollar short.
Stocks surged Wednesday, driving the Dow Jones industrials above 11,000 for the first time in eight months, as a relatively tame inflation report helped stoke expectations for more Fed rate cuts--assuming they’re needed to assure an economic rebound.
The Dow rocketed 342.95 points, or 3.2%, to 11,215.92--its highest since Sept. 12--in a rally that started slowly but built up steam as the day wore on. The Nasdaq composite index jumped 80.86 points, or 3.9%, to 2,166.44, though the advance just returned the index to its level of a week earlier.
Traders and money managers said the rush into stocks, after weeks of mostly sideways movement, was another sign of investors’ growing trust that the Fed can fix what ails the economy.
The central bank on Tuesday cut its key short-term interest rate half a point to 4%, the fifth such reduction this year. The move left short-term rates at seven-year lows as the Fed seeks to revive the weak economy by reducing the cost of credit and instilling more confidence in businesses and consumers.
Market veterans noted that stocks’ rebound from two-year lows reached in early April reflects the classic shift in thinking that occurs at some point in every period of economic turmoil: Investors start to buy shares well before a rebound is evident.
“I don’t think the economy and [corporate] earnings have bottomed, but I think the stock market probably has,” said Jeff Van Harte, manager of the Transamerica Premier Equity fund in Los Angeles.
He pointed to Applied Materials, which rallied $4.21 to $54.10 on Wednesday despite reporting weak quarterly earnings Tuesday.
“There is a sense that the bad news is getting out there, and with five rate cuts now, come on--how much worse can it get?” Van Harte said.
Some Wall Street pros, however, say stocks’ turnaround of the last six weeks is more likely to give way to a flat period in coming months as investors wait for more evidence that the economy is indeed reviving, and with it corporate earnings.
“I don’t think we risk rolling into recession, but nor do I think the Fed’s medicine is the prescription that gets us back to the robust growth we think we’re entitled to as Americans,” said Glenn Fogle, who manages American Century Vista fund. “As a business manager, if you don’t need an extra factory or fiber-optic network, the cost of borrowing is not going to spur you to go out and make that investment,” he said, referring to the excess of capacity in many industries.
“Profit estimates for next year are still extremely optimistic,” Fogle said. But when 2002 comes into focus and “people realize the valley is a lot deeper than they thought,” he said, “we could see a reprise of last year’s fourth quarter,” when the Nasdaq index nose-dived.
Still, on Wednesday at least, investors abided a time-honored rule: “Don’t fight the Fed.” When the central bank is cutting rates, it almost always spurs a rally in stocks.
Winners topped losers by 2 to 1 on the New York Stock Exchange and by 23 to 15 on Nasdaq in heavy trading.
The blue-chip Dow stole the show by breaking through the 11,000 mark. Since September the Dow had made five previous attempts to retake 11,000, only to fail each time.
The index was powered Wednesday by such heavy-industry names as 3M, up $7.95 to $125.50; General Electric, up $2.06 to $52.21; and Alcoa, up $2.51 to $44.51. Those companies would be expected to benefit from a pickup in economic growth.
At Wednesday’s close the Dow is 507 points, or 4.3%, below its peak of 11,722.98 reached Jan. 14, 2000. Broader market indexes are much further from their old peaks. The Nasdaq composite still is down 57% from its record reached in March 2000.
Stocks got support Wednesday from the bond market. Long-term yields have been rising in recent weeks--also reflecting expectations of an economic recovery--but they pulled back modestly Wednesday after the April inflation report. The yield on the 10-year Treasury note slipped to 5.46% from 5.50% Tuesday. Shorter-term yields also fell.
Stocks could get more help from the short-term end of the bond market soon, some analysts say: Investors have $2 trillion in money market mutual funds, but yields on the funds are falling fast. Imoneynet.com said Wednesday that the average seven-day simple yield on taxable money funds fell to 4.06% this week from 4.15% last week.
Money-fund yields below 4% could drive more people to look for potentially higher returns elsewhere--including the stock market.
Another bit of evidence Wednesday pointed to increasing investor confidence: The NYSE said total margin debt outstanding--brokerage credit used to buy stocks--rose 0.9% to $167 billion in April, the first increase in seven months.
Many market pros are watching to see whether the battered tech sector can retake the leadership role in the market, or whether investors will look elsewhere for stock ideas.
Transamerica’s Van Harte said he prefers “more stable” growth areas such as lodging, cable TV, drugstores and transaction processing--”definitely not the dot-coms or telecoms, where overcapacity issues remain a problem. Those stocks could end up being a lot like the oil stocks of the ‘80s, which didn’t come back for quite a while.”
Erik Voss, manager of Strong Advisor Endeavor 20 fund, said he has been adding to holdings with “solid fundamentals,” including the satellite TV company EchoStar Communications and interactive programming firm Gemstar-TV Guide. He also likes Dollar Tree Stores, a retailer he expects to benefit as the economy perks up.
Market Roundup: C6, C7
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Price Check
The consumer price index rose 0.3% in April, a smaller-than-expected gain. Still, the increase left the CPI up 3.3% from a year earlier. It was the 14th month in the last 16 with inflation above 3%--the worst stretch of rising prices since 1991.
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Consumer price index, year-over-year percentage gain
April: +3.3%
Sources: Bloomberg News, Times research
11,000-Plus
The Dow Jones industrial average surged above 11,000 on Wednesday for the first time since September.
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Dow Jones industrials, monthly closes and latest
Wednesday: 11,215.92
Source: Bloomberg News
