NEW YORK -- A slow morning on Wall Street turned abruptly into a euphoric afternoon as confidence mushroomed that recent declines in interest rates could revive the economy.
"It was unbelievable, it really was," said Ned Collins, a trader at Daiwa Securities, summing up sentiments expressed by many. "It was a wonderful Santa Claus rally. I think this is telling us we are within months of a recovery."
The Dow Jones industrial average rose almost 100 points before a last minute sell-off left the bellwether 30-stock index up 88.10 points at 3,022.58. It was the first time the Dow had breached the 3,000 level in six weeks and was the best day on Wall Street since similar gains were racked up in August on news that the Soviet coup had failed.
Among the surging issues were auto manufacturers, airlines, retailers and banks -- all sectors of the economy that have been undermined by the 1980s legacy of bad debts and exhausted consumption.
On Friday, in response to deteriorating business conditions, the Federal Reserve Board reduced the short-term rate it charges on loans to member banks to 3.5 percent, a level not seen in decades. Yesterday, for the second session in a row, the move was echoed in declining rates on long-term bonds, a facet of the securities market that cannot be fully controlled by the Fed but that is often considered more important in determining business activity.
Confronted by the dramatic decline in financing costs and the historical truism that such moves have re-ignited growth, investors appeared to plunge back into equities.
"The feeling everyone has," said Bryon Wien, a Morgan Stanley strategist, "is that it [the economy] may not be turning now, but it will, and they want to be there when it does."
The emergence of new optimism pierced the gloom of a Christmas that has been been economically Grinched by innumerable layoffs, bankruptcies and liquidations. In November, the Dow fell below 3,000, drowned in a deluge of downward revisions on future business conditions and corporate profits.
The intensity of yesterday's reversal caught most people by surprise. "I think it was expected there would be some follow-through from Friday, but 100 points wasn't perceived to be in the cards," said Eric Miller, chief investment strategist with Donaldson Lufkin & Jenrette.
As the session began, activity at the New York Stock Exchange was minimal and the number of traders unusually sparse. In response to the listless activity, Robert Fagenson, a specialist on the floor of the exchange, said his partner left for the afternoon and Mr. Fagenson briefly went off to do errands, only to return to an intense rally. "From one minute to the next," he said, "it went from lackadaisical to dynamic."
Volume on the New York Stock Exchange was a heavier-than-normal 229.18 million shares. Three issues rose for every one that declined, but much of the activity was focused in the largest issues, including Ford, Westinghouse, General Motors, American Airlines and International Business Machines.
"The share prices of these issues were discounting a lot of bad news, they were ready to rally," said Gail Dudack, an analyst at S.G. Warburg & Co.