Dow responds positively to bank's action

August 17, 1994|By Bloomberg Business News

NEW YORK -- U.S. stock and bond prices posted their largest gains in more than two weeks yesterday after the Federal Reserve raised key lending rates by a half-percentage point, bolstering confidence that economic growth will stay moderate and that corporate earnings continue to expand.

The yield on the Treasury's 30 1/4 -year bond dropped to 7.37 percent from 7.51 percent. Bonds posted their largest gain since July 29.

Companies gave plenty of evidence of rising profitability yesterday. Earnings gains at Dayton-Hudson Corp., Home Depot Inc. and Wal-Mart Stores Inc. drove up retail stocks, and Hewlett-Packard Co. reported stronger-than-expected net income.

Stock prices will continue to gain "because people have worried about the interest-rate factor long enough," said Thom Brown, managing director at Rutherford, Brown & Catherwood Inc. in Philadelphia. Investors will focus now on the "corporate earnings picture, which looks pretty good."

The Dow Jones industrial average jumped 24.28, to 3,784.57, the biggest rise since Aug. 1, fueled by Caterpillar Inc., Coca-Cola Co. and International Paper Co. Three rounds of computer-guided buy orders added almost 30 points to the average, according to Birinyi Associates.

Among broader market indexes, the Standard & Poor's 500 index rose 3.78, to 465.01, helped by rising soft drink, health care, drug, electronic instrument and auto stocks.

The Nasdaq composite index climbed 2.62, to 735.51, as Intel Corp., Miscrosoft Corp., DSC Communications Corp. advanced.

Four stocks rose for every three that fell on the New York Stock Exchange, where 304.5 million shares changed hands.

Fund managers said stocks will become more attractive than bonds as long as yesterday's rate increase promotes stable economic growth and pushes any further rate increases farther into the future.

Money managers also said yesterday's rate rise had long been anticipated and was already reflected in share prices. "Nobody was worried about a half-point increase, because everybody was predicting it," said Mr. Brown.

Many investors also expected stocks to rally if the Fed aggressively raised rates, said Phillip Krauss, assistant manager Kemper Financial Services in Chicago. The Dow Jones industrial average climbed 143 points, or 3.9 percent, in the month after the Fed last raised interest rates on May 17.

Merck & Co., Cisco Systems Inc., Wal-Mart Stores, Compaq Computer Corp. and Home Depot Inc. were the most active stocks in composite trading.

Hewlett-Packard jumped $8.50, to $87.625. The computer maker said fiscal third-quarter net income climbed to $1.33 a share from $1.06 last year. Earnings topped analysts' consensus forecast of $1.28.

Among retailers, Dayton-Hudson climbed $1.75, to $85.25. The Minneapolis-based chain said its second-quarter net income more than doubled. Wal-Mart rose 50 cents, to $24.25. The retailer said second-quarter net income rose to 25 cents a share from 22 cents. Home Depot vaulted $2.375, to $44.375. The nation's largest home-improvement chain said fiscal second-quarter net income increased 32 percent as same-store sales gained 6 percent.

PepsiCo Inc. spurted $1.125, to $32.25. The soft-drink maker and owner of Taco Bell and other fast-food outlets said it will resume buying back its shares, less than a month after it said it stopped.

American Cyanamid Co. jumped $3.125, to $94. American Home Products Corp., down 12.5 cents, to $58.875, increased its takeover bid for the company to $100 a share, or $9 billion, from $95 a share, if Cyanamid agreed to a friendly takeover yesterday.

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