Rally Lifts Key Indexes to New Highs

By Tom Petruno

Feb. 23, 2006 12 AM PT

Times Staff Writer

Stocks rallied broadly Wednesday, pushing a number of key market indexes to record highs as a government report provided some relief from inflation worries.

A drop in long-term bond yields and a pullback in oil prices also helped to extend this year’s bull run on Wall Street, which has the Dow Jones industrial average off to its fastest start since 1998.

The Dow rose 68.11 points, or 0.6%, to 11,137.17, a new 4 1/2 -year high. It is up 3.9% this year.

In a sign of the rally’s breadth, the composite index of all New York Stock Exchange issues gained 0.6% to a record 8,128.20, surpassing the previous peak reached Feb. 1.

The Labor Department said its consumer price index jumped 0.7% in January, largely because of a surge in energy prices.

Excluding energy and food costs, the so-called core inflation index was up 0.2% for the month, a relatively tame rise that was in line with changes in recent months.

Although the Federal Reserve is widely expected to raise its benchmark short-term interest rate at least two more times this year, a continuation of mild core inflation could mean less pressure on policymakers to keep pushing rates up after that, some analysts say.

A key underpinning of this year’s stock rally is the assumption that the Fed will slow the U.S. economic expansion but won’t kill it, said Steven Stanley, chief economist at investment firm RBS Greenwich Capital Markets in Greenwich, Conn.

For now, investors may even be taking comfort in the likelihood of additional Fed rate increases, he said.

“If the Fed is raising rates, it means the economy is doing pretty well,” Stanley said.

New Fed Chairman Ben S. Bernanke said as much last week in congressional testimony. His upbeat assessment of the economy, along with some robust corporate earnings reports, helped drive stocks higher for the week, reviving an advance that had stalled out early this month.

Whatever the reasons, investors again are buying stocks across many industry sectors, as they did in January. The Dow transportation stock average joined the NYSE composite index at a record high Wednesday, rising 1.2% to 4,449.17.

A Bloomberg index of real estate investment trust shares also reached a record, gaining 1% for the day, indicating optimism about the outlook for commercial real estate.

Financial services stocks, including banks and brokerages, were among the day’s biggest winners. Because those companies might have the most to lose from a sustained rise in interest rates, their rally suggested that many investors were confident the Fed would be done tightening credit reasonably soon, perhaps after boosting its key rate from the current 4.5% to 5% by mid-May, some analysts said.

An index of 12 major brokerage stocks surged 1.6% to a record high.

“That’s a very bullish sign at a time when the market is pricing in a 5% [Fed] rate,” said Michael Darda, economist at investment firm MKM Partners in Greenwich, Conn. Strength in brokerage stocks often points to faith in a bull market’s longevity.

A decline in Treasury bond yields was another sign of optimism about interest rates. The core inflation data for January was a relief to some bond investors, who had worried that any pickup in inflation could signal that the Fed had fallen behind in restraining price pressures.

The yield on the 10-year Treasury note fell to 4.52% from Tuesday’s close of 4.57%. The 30-year T-bond yield dropped 0.05 point to 4.48%, its lowest since the bond was sold at a yield of 4.53% on Feb. 9 -- which was the first Treasury auction of 30-year securities in more than four years.

“One reason the stock market is doing so well is that long-term rates are staying so low,” said Michael Metz, investment strategist at fund manager Oppenheimer Holdings in New York. A sharp rise in long-term rates could crimp the economy by slowing business investment and damping demand for housing.

Oil prices also helped Wall Street on Wednesday, as near-term crude futures in New York slid $1.73 to $61.01 a barrel. Oil had rebounded in recent days after hitting an eight-week low last week.

Among the day’s highlights:

* The S&P; 500 index rose 9.63 points, or 0.8%, to 1,292.67, nearing the 4 1/2 -year high of 1,294.18 reached Jan. 11. The Nasdaq composite gained 20.21 points, or 0.9%, to 2,283.17. Nasdaq also hit a 4 1/2 -year high Jan. 11, when it closed at 2,331.36.

Winners topped losers by more than 2 to 1 on the New York Stock Exchange and by more than 3 to 2 on Nasdaq.

* An S&P; index of 600 smaller stocks jumped 2.93 points, or 0.8%, to 378.58, just under its Feb. 1 all-time closing high of 379.98.

* In the banking sector, Comerica rose $1.29 to $57.77, Wells Fargo added 88 cents to $64.39 and Golden West Financial soared $2.32 to 71.57.

Among brokerages, Bear Stearns jumped $2.62 to $136, Goldman Sachs gained $2.08 to $145.53 and UBS was up $1.26 to $110.10.

* Many industrial issues were higher, buoyed by optimism about the economy. Boeing rose $1.34 to a record $74.39. Other winners included truck-parts maker Eaton, up $1.56 to $69.86; farm-equipment giant Deere, up $1.22 to $78.89; and appliance leader Whirlpool, up $1.72 to $91.11.

* Home builders rebounded from a recent sell-off. KB Home soared $2.20 to $70.12 and Lennar was up $2.26 to $61.06.

* On the down side, Intel slid 47 cents to $20.15, its lowest since September 2004, after an analyst at ThinkEquity Partners warned that the firm could fall short of earnings estimates this quarter because of a pricing battle with rival Advanced Micro Devices.

Other chip stocks were mostly higher. AMD gained 75 cents to $40.80 and Broadcom rallied 91 cents to $44.90.

* The Treasury sold $22 billion of new two-year notes at a yield of 4.69%. Traders described investor demand as decent.

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Broad advance

The stock market’s rally this year is broad-based. Energy stocks, last year’s leaders, have been eclipsed by other sectors.

Year-to-date gains in key indexes:

REITs(1) : +10.3%

S&P; small stocks: +8.0

Nasdaq biotech: +7.3

Dow transports: +6.0

NYSE energy: +5.4

NYSE financials: +5.4