NEW YORK -- Stocks rallied yesterday amid signs that President Clinton's deficit-reduction plan is poised to gain Senate approval.
Diminished concern about a rising inflation rate contributed to the surge in stocks, traders said.
The Dow Jones industrial average, which lost 27.40 points Friday, gained 24.91, to close at 3,552.34, just shy of its record close of 3,554.83, set Thursday. The Dow soared as high as 3,569.50, at about 3 p.m., before falling victim to computer-driven sell orders.
"I think there's more reason to be optimistic about some sort of budget agreement getting through the Senate," said Edward Laux, head trader at Kidder, Peabody & Co.
Sen. David L. Boren of Oklahoma said last weekend that he was prepared to work out a deal with Mr. Clinton to allow a scaled-down energy tax to pass the Senate. Mr. Clinton's budget director, Leon E. Panetta, said the remarks by Mr. Boren, who has the power to kill the tax in the Senate Finance Committee, offered hope that a modified tax would pass the Senate.
Mr. Clinton's plan, which won passage in the House last week, calls for higher taxes and less spending to reduce the deficit by about $500 billion over five years.
Yesterday's rally brought broader stock-market indexes closer to their closing records. The Standard & Poor's 500 gained 3.64, to 453.83, approaching its record closing high of 456.34, set March 10. The Nasdaq Combined Composite climbed 3.75, to 704.28, slightly below its record close of 708.85, set Feb. 4.
"The fuel for this particular fire" is encouragement about the prospects for Mr. Clinton's budget package, as reflected in the Treasury-bond rally, said Laszlo Birinyi of Birinyi Associates.
The 30-year Treasury bond soared more than a point, to yield 6.88 percent, down 10 basis points from Friday's close and the lowest closing yield since May 12. A smaller deficit would reduce the amount of securities the government must sell to finance operations and would ease upward pressure on interest rates.
Meanwhile, a plunge in gold prices "is helping to cool the inflationfires," thereby helping both stocks and bonds, said Kidder's Mr. Laux. Gold for August fell $9 an ounce, to $371.30, on the Commodity Exchange. Gold prices have soared about 15 percent since March on the perception that inflation might be accelerating. Many traders now believe that deficit reduction and higher consumer taxes will keep bond prices high and inflation low.
Also quelling inflation fears was a drop in the Commodity Research Bureau's index of 21 commodities. The index fell 1.74, to a three-month low of 206.9. A falling inflation rate eases pressure on the Federal Reserve to raise interest rates.
Among stocks in the S&P 500, gold shares registered the biggest declines, followed by stocks of banks, household products and beverages. Shares of semiconductors, regional Bell operating companies, electrical equipment and electric utilities gained the most.
Advancing stocks on the New York Stock Exchange exceeded declining issues by about 5-to-3. Trading was moderately active, with about 230 million shares changing hands on the NYSE. Financial markets were closed Monday for Memorial Day.