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Stocks Gain Ground on Economic Data

Times Staff Writer

Stocks staged another broad rally Tuesday, pushing most major indexes to new highs for the year, as upbeat reports boosted optimism about the economy.

The federal tax cut plan, which President Bush is expected to sign into law today, also helped lure money into the market as investors returned from the holiday weekend, analysts said.

The Nasdaq composite index, dominated by technology issues, climbed 46.60 points, or 3.1%, to 1,556.69, its biggest one-day gain since April 2 and highest close since June 5.

The Standard & Poor’s 500 index rose 18.26 points, or 2%, to 951.48, its highest finish since Aug. 22.

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The Dow Jones industrials added 179.97 points, or 2.1%, to 8,781.35. Unlike nearly all other well-known indexes, the 30-stock Dow hasn’t yet topped its mid-January levels, but it is getting nearer: Its 2003 closing high is 8,842.62, reached Jan. 14.

Trading was heavy, and rising stocks outnumbered losers by more than 2 to 1 on the New York Stock Exchange and Nasdaq.

The market’s steady advance over the last two months has lifted the S&P; 500 index 18.8% since March 11 and the Nasdaq index 22.4% in the same period. Many investors, mindful of several failed rebounds since the bull market peaked in 2000, have been expecting this one too to quickly fade.

“But with every rally, more people start to believe this is real,” said Doug Sandler, chief equity strategist at Wachovia Securities in Richmond, Va.

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That could begin to attract to stocks some of the $5 trillion that wary investors and savers have parked in money market mutual funds and short-term bank accounts, some analysts say.

As stocks rose in March and April, market bulls said Wall Street was forecasting a pickup in the economy in the second half of the year, even though most data at the time were downbeat.

Some reports Tuesday suggested that a key requirement for a decent second half -- an optimistic consumer -- is becoming a more reasonable bet.

The Conference Board said its consumer confidence index rose to 83.8 in May from 81 in April. More important, some analysts said, was that the “expectations” component of the index rose to an eight-month high.

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Also on Tuesday, the government said that both new and existing home sales rose in April from March. Some economists had expected a modest decline.

Heading into summer, with benchmark interest rates at or near record lows and federal tax cuts on the way, the economy and the stock market are enjoying “some very favorable fundamentals,” said Gary Thayer, economist at brokerage A.G. Edwards in St. Louis.

The new tax law will cut the maximum tax rate on dividend income to 15% from 38.6%, and the maximum rate on long-term capital gains to 15% from 20%.

The sharp reduction in the dividend tax rate helped to boost some high-dividend stocks, such as utilities, on Friday.

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On Tuesday, however, Wall Street was led by many of the technology issues that are among the market’s more speculative shares -- and very few of which pay dividends.

The tech-stock rally may have been driven by rising hopes for stronger business spending on tech equipment in the second half, some analysts said.

One element of the tax law is an increase to $100,000, from $25,000, of the annual amount a small business may immediately deduct for investment in new equipment, noted Phil Orlando, senior portfolio manager at Federated Investors in New York.

That could help the tech sector if more businesses upgrade their computer equipment.

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But tech stocks’ gains Tuesday also may have been a function of sheer momentum: Because that sector has led the market this year, it’s attracting capital from investors who like to chase what’s already hot.

Chip company Broadcom jumped $1.69, or 7.7%, to $23.72, extending its year-to-date gain to 57.5%. Telecom equipment firm Adtran rose $3.27, or 7.2%, to $48.67. It is up 47.9% this year.

Some tech-stock buyers may be figuring that short sellers -- traders who borrow stock and sell it, betting on lower prices -- are on the verge of rushing to close out their bets.

The Nasdaq market Tuesday reported that the number of shorted Nasdaq shares as of mid-May remained near record highs. The total slipped 1.6% from mid-April’s record and stood at 4.386 billion May 15.

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If short sellers fear that stock prices will continue to rise, they may be compelled to buy shares to repay their loans. Their buying could provide more fuel for a market rally.

By one measure, however, investor confidence declined in May: Brokerage UBS Warburg said its index of investor optimism fell to 42 this month from 66 in April. The index is based on a survey of 1,000 investors.

But UBS noted that the index had rocketed in April from a record low of 5 in March. The firm also said 58% of investors said now is a good time to invest in markets, the highest total since June.

In other trading Tuesday, the euro ran out of steam after reaching a record high against the dollar in Asian trading early in the day. The euro ended at about $1.185 in New York after trading as high as $1.193.

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Treasury bond yields were mixed. Longer-term yields rose, with the benchmark 10-year Treasury note ending at 3.42%, up from 3.34% on Friday. Some traders said investors were nervous that economic data could begin to show a faster-than-expected recovery, which could put upward pressure on rates.

But the two-year T-note yield dipped to 1.30% from 1.35%.

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(BEGIN TEXT OF INFOBOX)

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Rally booster

Tuesday’s stock market advance padded the year-to-date gains of major indexes.

*--* % gain % gain Index Tues YTD SOX chip stocks 6.1% 26.3% Nasdaq biotech 5.7 35.8 Nasdaq composite 3.1 16.6 Nasdaq telecom 2.2 26.6 Dow industrials 2.1 5.3 S&P; 500 2.0 8.1 S&P; mid-cap 1.9 7.8 S&P; small-cap 1.9 6.1 Dow utilities 1.6 15.6 NYSE composite 1.5 7.4

*--*

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Source: Bloomberg News


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