Investors shake fear, spark rally Traders discount Fed rate move, sending Dow up

February 08, 1994|By New York Times News Service Bloomberg Business News contributed to this article.

NEW YORK -- As most of the world's stock exchanges languished yesterday, Wall Street forged ahead in a frenzy of buying, with apprehensions easing, at least for now, that last week's Federal Reserve Board decision to nudge up short-term interest rates would end the three-year bull market.

Stocks across the board benefited from yesterday's surprisingly strong rally, as fears quickly receded of a "Blue Monday," a paler version of the Black Monday of Oct. 19, 1987, when the Dow Jones industrial average plunged 508 points after a Friday fall of 108 points.

Investors had the weekend to listen to financial commentators argue that 1994 did not equal 1987. Many market watchers derided Friday's 96.24-point drop in the Dow as an overreaction to what most pundits called a prudent anti-inflationary move by the Fed, a modest 0.25 percentage-point rise in a key short-term interest rate.

In unusually heavy trading, investors bid up the Dow by 34.90 points, to 3,906.32, led by computer and aluminum stocks. The broader Standard & Poor's 500-stock index inched up 1.95 points, to 471.76, led by electrical equipment stocks.

Even the smaller-company measure, the Nasdaq composite index, after a sharp drop early in the session, rallied 1.91 points, to 779.20, led by biotechnology stocks.

"Wall Street held a 2 percent off sale, and the public came and bought," said David Shulman, chief equity strategist for Salomon Bros. Inc. The Dow dropped more than 2 percent Friday.

At the nation's largest mutual fund company, Fidelity Investments, "it was an extremely quiet day today," said Tracey K. Gordon, a spokeswoman. The only detectable change was that investors seemed to be favoring conservative equity funds, like the $5.3 billion Balanced Fund.

"People have heard the message and gotten it: Don't panic," Ms. Gordon said.

But whether yesterday's session was simply the serene opening to a turbulent week was still unclear. On Friday, the Bureau of Labor Statistics is set to report the January Producer Price Index, which analysts expect to show the first significant rise since April.

That kind of bad inflation news could sour the market, because investors might conclude that it would force the Fed into raising short-term

rates even further later in the year, making everything from consumer mortgages to corporate debt more expensive, and reigniting Wall Street's worries.

Salomon Bros.' economists project that Friday's Producer Price Index will rise about six-tenths of 1 percent, with a "core" rate, stripped of energy and food prices, of four-tenths of 1 percent. That is above the consensus core rate of between two-tenths and three-tenths of 1 percent.

"If we're right, things could be a little messy," Mr. Shulman said, referring to a possible stock market drop Friday. The market would then expect more Fed tightening, he said.

Indeed, Mr. Shulman expects some market correction as investors try to anticipate a further interest rate rise of a half to three-quarters of a point over the next few months.

Also, U.S. bonds fell yesterday for a third consecutive session as bond firms drove yields higher to attract investors to the Treasury's record sale of $40 billion in notes and bonds this week.

That is sure to add further pressure on interest rates, after the Fed's action. The benchmark 30-year bond fell 13/32 of a point yesterday, as the yield rose to 6.39 percent from 6.36 percent Friday.

Overseas, investors worried that Friday's fall in the U.S. stock market and rise in interest rates would mean a sweeping repatriation of U.S. investment dollars from Asia and Europe.

Japan's Nikkei 225-stock index dropped 1.4 percent yesterday, and Hong Kong's Hang Seng index plunged 6.1 percent. Britain's Financial Times 100 index dropped 1.62 percent, and France's CAC 40 index fell 1.81 percent.

(This morning, Japanese stocks rallied strongly as traders expected the government to finalize a long-delayed package of tax cuts. At the end of the morning session, the Nikkei was up 501.95 points, or 2.51 percent, at 20,516.35.)

Meanwhile, the price of gold -- often an indicator of inflationary expectations -- dropped sharply yesterday on the New York Commodity Exchange. Gold for April delivery fell $7.60, to $380.70 an ounce, while silver dropped 18.7 cents, to $5.24 an ounce.

Volume on the Big Board was 346.8 million shares, and the New York Stock Exchange index rose 0.80 point, to 262.01. Declining stocks outnumbered gaining ones by a 10-to-9 margin.

The Dow was moved mainly by seven stocks: IBM, Alcoa, Disney, General Electric, Union Carbide, General Motors and Caterpillar. These stocks alone made up nearly 26 of the Dow's almost 35-point rise.

IBM rallied $2.25, to $54.25, recovering from Friday's decline of $3.75. The stock was named one of the most popular stocks of institutional money managers in a poll conducted by Barron's magazine.

Alcoa rose $2, to $78.125. Vanguard Group's John Neff and Lehman Bros. strategist Elaine Garzarelli recommended Alcoa, Reynolds Metals Co. and USX-U.S. Steel Group Inc. as good investments, the Wall Street Journal's "Heard on the Street" column said.

Amgen soared $2.125, to $44, after Salomon Bros. Inc. raised its rating of the biotechnology stock to "buy" from "hold."

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