Stocks leap on prospect of rate cut Greenspan testimony sends Dow industrials surging 257 points

5th-busiest session ever

Small companies join the fun with Russell 2,000 up 2.11%


September 24, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

The stock market rallied sharply yesterday after Federal Reserve Board Chairman Alan Greenspan signaled for the third time in two weeks that interest rates could be cut because of spreading global economic problems that are beginning to infect the United States.

The Dow Jones industrial average jumped 257.21 points, or 3.26 percent, to 8,154.41 as many economists and stock market analysts believe that the Fed will come to the rescue and cut interest rates.

Greenspan "has an eye on the market, and he is seeing fears of recession and fears of depression," said Angel Mata Jr., head of listed equity trading at Baltimore-based Legg Mason Wood Walker Inc.

"He wants to let the world and the stock market know that he sees what is happening and he is going to help the situation."

Greenspan's testimony before the Senate Budget Committee boosted all U.S. markets.

Three stocks rose for every one that fell on the New York Stock Exchange, and volume surged to 900.2 million -- the fifth-highest ever -- compared with 694.9 million Tuesday.

The Standard & Poor's 500 stock index, a broad measure of the market, rose 36.46 points, or 3.54 percent, to 1,066.09.

The Nasdaq composite, dominated by major technology firms, jumped 62.47 points, or 3.68 percent, to 1,760.27.

Even small companies, which have been snubbed by investors wanting blue-chip stocks, rallied, with the Russell 2,000 index rising 2.11 percent, or 7.76 points, to 373.

Among other broad indexes, the Wilshire 5,000 index rocketed 314.44 to 9,767.23; the American Stock Exchange composite index jumped 12.63 to 646.08; and the S&P 400 midcap index added 8.68 to 318.65.

The Sun-Bloomberg Maryland Index, which tracks the top 100 Maryland stocks by market valuation, gained 4.11 to 187.96.

Although the stock market rose steadily most of the day, it began climbing more sharply shortly after Greenspan's testimony began about 2 p.m.

Greenspan spoke about spreading world economic problems in Thailand, Russia and Latin America, saying there is "little evidence to suggest that the contagion has subsided."

He reiterated a point made in a Sept. 4 speech at the University of California at Berkeley, where he first hinted that rates could be cut, saying the United States cannot "remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress."

He said "policy-makers around the world have to be especially sensitive to the deepening signs of global distress, which can impact their own economies."

While Greenspan said that the world's problems have not significantly weakened the U.S. economy, he noted that "we can already see signs of the erosion of production around the edges, especially in manufacturing."

Experts said an interest rate cut would reduce the value of the dollar and spur exports while helping countries stabilize falling currencies. Lower rates would also make it cheaper for corporations here and abroad to borrow money. And it would be a step in restoring confidence in the increasingly volatile stock market.

"Everything is based on confidence, it is such a fragile thing," said James Glassman, senior U.S. economist at New York-based Chase Manhattan Bank. "The risks are changing. It makes sense for them to back off."

Glassman said Greenspan's testimony sends a message that "the Fed is in charge."

While a rate cut of a quarter of a percentage point "is not going to fix the world's problems, it is going to help stabilize the psychology," Glassman said.

He expects the Fed to cut rates by a quarter of a point next week, and by as much as a half a percentage point in November if overseas economies worsen.

Peter Anderson, chief investment officer at American Express Financial Advisors in Minneapolis, said he doesn't expect Greenspan to cut rates until December, because the top central banker has been openly concerned that stock prices are too high.

"It makes no sense to me," Anderson said. "I don't think he is going to cut rates to make the equity market higher. Normally, they [the Fed] don't change on a dime and that is what we are talking about."

The closely watched Dow has gained 615.34 points since the beginning of the month. Yesterday's Wall Street surge made Legg Mason's Mata a bit nervous.

"We are up 250 points purely on his [Greenspan] saying something has to be done to cure the world crisis," Mata said. "I am wondering if it is too much too soon."

The U.S. rally followed gains in stock markets around the world. In Europe, the Bloomberg 500 index gained 2.5 percent, the United Kingdom's FT-SE 100 index rose 2.2 percent and Germany's DAX Xetra index climbed 3.8 percent.

Hong Kong's Hang Seng index rose 1.8 percent. Japanese markets were closed for a holiday.

In U.S. trading, Citicorp jumped $10.375 to $105.50 and Travelers Group Inc. rose $3.625 to $43 after their $46.4 billion merger won approval from the Federal Reserve and the Justice Department, the last obstacles to the combination.

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