Cyclicals lead rally Dow adds 15.14

September 29, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks rose yesterday, led by economically sensitive issues, amid optimism the Federal Reserve's apparent decision Tuesday not to raise interest rates will enable the economy and corporate profits to keep growing.

"While the Fed inactivity has been viewed as bad for the bond market, there's now the prospect for continued growth in the economy, increasing pricing flexibility for companies and continued growth in corporate profits," said James Solloway, director of research at Argus Research Corp.

The Fed has raised rates five times this year in its continuing campaign to keep inflation in check. Higher rates are bad for stocks because they encourage people to put their money in fixed-rate investments that are perceived as less risky. They also boost corporate borrowing costs, which hurts profits.

The Dow Jones industrial average rose 15.14, to 3,878.18, its highest since Sept. 19. The average's 46.43-point advance over the last three days recaptured almost half of last week's 101.6-point, or 2.6 percent percent, decline.

Shares of so-called cyclical stocks sensitive to swings in the economy -- Caterpillar Inc., AlliedSignal Inc., Du Pont Co. and Aluminum Co. of America -- led the advance. The Morgan Stanley cyclical index rose 1.65, to 300.13.

Among broader measures, the Standard & Poor's 500 index gained 2.79, to 464.84, its highest since 470.85 on Sept. 19. The advance was led by shares of telephone, oil and chemical companies.

Shares of regional Bell telephone companies gained for a second day, after Nynex Corp. submitted a plan to New York state regulators that would eliminate a limit of 12 percent return on equity from the company's local phone operations. The provision is seen boosting profits.

Shares of Nynex gained 87.5 cents, to $38.875; Southwestern Bell Corp. rallied $1.25, to $43.50; BellSouth Corp. gained 87.5 cents, to $57.75; and U S West Inc. climbed 62.5 cents, to $39.625.

Chemical stocks were led higher by Dow Chemical Co., which rose $1.875, to $78.50. The Midland, Mich., company is teaming with the Russian gas giant RAO Gazprom in a potential bid to buy three chemical plants once run by the East German Communist government. The plants make ethylene and ethylene derivatives, products used in the manufacture of most plastics.

The Nasdaq composite index climbed 4.64, to 760.01, its biggest one-day rise since a 5.82-point advance on Sept. 13.

Advancing stocks outpaced decliners by about 7-to-4 on the New York Stock Exchange, where about 330.3 million shares traded hands. The three-month daily average volume is 272 million shares.

Douglas Person, vice president at Bridges Investment Counsel in Omaha, Neb., a manager of $600 million in assets, is betting on cyclical stocks, because he thinks that the economy will continue to expand and that interest-rate increases to date won't quash earnings.

"Investors now seem to be driven more by the perception that earnings will increase dramatically than interest rates will put a lid on stock price performance," he said. "If there's leadership in the market now, clearly it's in the cyclicals."

Mr. Person said part of the rise in big, economically sensitive stocks could be the desire of investors to own shares of companies whose prices don't rise and fall dramatically. "Sometimes investors like to seek large-cap safety and more liquidity," he said.

Mr. Person also likes shares of companies that maintain a dominant share of their industries, including Microsoft Corp. and Motorola Inc.

Mexican stocks traded in the United States tumbled after the secretary-general of the nation's ruling party was shot in Mexico City. Telefonos de Mexico SA's series L American depositary receipts, each representing 20 series L shares, declined $1.25, to $63.125. Coca-Cola Femsa SA's ADRs, each representing 10 series L shares, closed at 36 7/8, down 1.

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