NEW YORK BLOOMBERG BUSINESS NEWS CONTRIBUTED TO THIS ARTICLE — NEW YORK -- Wary stock traders, caught off guard by the good news on inflation in yesterday's retail-sales report, suddenly bid prices up in the broadest rally for stocks since last summer.
The unanticipated slump in December retail sales prompted optimism among traders that the Federal Reserve would either raise interest rates only slightly at its policy meeting Jan. 31 and Feb. 1, or might even wait until its next meeting in March.
The Fed has raised rates to slow what it regarded as an overheating inflationary economy, but the slump in retail sales may indicate the economy has cooled faster than expected.
Bond prices surged, with the yield on the 30-year bond dropping to 7.78 percent, from 7.88 percent on Thursday.
The price of gold, often a fever chart of market anxieties about inflation, fell sharply. But the dollar was still mixed in international currency markets, a measure of continuing international wariness of the U.S. rescue of the Mexican economy.
Yesterday's rally culminated a hesitant week when the Dow Jones industrial average barely budged off dead center for four sessions in a row.
The Dow jumped 49.46 points, to 3,908.46, while the broader Standard & Poor's 500 index rose 4.33 points, to 465.97. The smaller-company Nasdaq composite index advanced 5.65 points, to 762.16.
The New York Stock Exchange had the largest number of advancing stocks since July 29, when advancing stocks outnumbered declining issues by 1,015.
Yesterday, advancing stocks outnumbered declining stocks by 1,680 to 658. It was the widest margin since July 29.
"It was a very good day today, considering the last couple of days," said Paul Hennessey, senior vice president for the Boston Company Asset Management Group, which manages $18 billion stocks.
Mr. Hennessey noted that companies like Citicorp had been able to defuse concerns about the Mexican crisis and raise its falling share price.
Yesterday, Citicorp rose $1.625, to $40.625. And Telefonos de Chile, after falling for several days, gained $3.875, to $78.
"The rally can be traced back to the pressure coming off stocks with operations in Latin America and the retail sales coming in and surprising people," Mr. Hennessey said.
"There's still a lot of money coming out of bond funds and a lot of reinvestment dollars being used," said Dudley Eppel, managing director in charge of listed equity trading at Donaldson, Lufkin & Jenrette.
"Also, this market was clearly oversold, and there are just fewer people around on a Friday to keep things from getting out of hand, even on the upside."
Volume on the New York Stock Exchange was above normal, with 336.7 million shares changing hands, about 7 percent above this year's daily average of 316 million shares.
Stocks rallied so strongly that the Dow jumped 50 points at 3:55 p.m. and the New York Stock Exchange put into effect its so-called circuit-breaker rules designed to slow down high-speed computer-guided trading.
Gold stocks shed 1.1 percent yesterday, after rallying 9 percent during the previous four days.
Quaker Oats jumped $4.50, to $36.125, boosted by a report by CNBC-TV commentator Dan Dorfman that Coca-Cola Co. may make a hostile bid for Quaker, after its $60-per-share purchase offer was rejected by Quaker.
Two computer-related stocks fell. Lotus Development, a leading software developer, dropped $1.25, to $43, after analysts said a rival, Microsoft, might post strong earnings at the expense of Lotus and others.
CNBC's Mr. Dorfman said that America Online shares could fall more than 15 percent, without citing a reason why. America Online, a leading computer information service, dropped $1.875, $50.
Home Shopping Network sank $1.25, to $8. It expects to report disappointing fourth-quarter results.