Stocks rise 6th time in week Dow close: 8,466

Federal Reserve's cuts in rates stir optimism that recession is at bay

October 20, 1998|By BLOOMBERG NEWS

NEW YORK -- U.S. stocks rose for the sixth time in seven days yesterday on optimism that Federal Reserve interest-rate cuts will keep a U.S. recession at bay. Banks and small stocks led the gains.

The Dow Jones industrial average rose 49.69, or 0.6 percent, to 8,466.45, its highest closing level since Aug. 26.

The Standard & Poor's 500 index climbed 5.97, or 0.6 percent, to 1,062.39, and the Nasdaq composite index jumped 27.78, or 1.7 percent, to 1,648.73.

Two stocks rose for every one that fell on the New York Stock Exchange.

"Talk of recession has subsided with the Fed easing," said Jay Suskind, director of trading at Ryan, Beck & Co. "And if the Fed is loosening credit, that will help the banks."

The Fed unexpectedly cut benchmark interest rates Thursday for the second time in less than three weeks to avert a credit crunch and a U.S. slowdown.

Spurred by the rate cut, which lowers the cost of borrowing for businesses and consumers, the Dow average has rallied 6 percent in the past three days and almost 10 percent since Oct. 8.

Small stocks have done even better. The Russell 2000 index of small-capitalization stocks is up 14 percent in the same period.

Yesterday, the Russell rallied 9.58, or 2.8 percent, to 352.45. Small shares have been hammered this year as mutual fund managers favored large companies thought to have predictable earnings. The Russell, even with yesterday's rally, is off 28 percent from its April 21 high. The Dow is less than 10 percent below its July 17 peak.

Among other broad market indexes, the Wilshire 5,000 index gained 86.32, to 9,622.85; the American Stock Exchange composite index inched up 1.22, to 605.72; and the S&P 400 midcap index added 4.63, to 314.94.

Maryland stocks rose, led by Healthcare Financial Partners and Medimmune Inc. The Sun-Bloomberg Maryland index, which tracks the top 100 stocks in Maryland by market valuation, gained 3.47, to 178.23. Healthcare Financial Partners rose $5.4375, to $36.4375. Medimmune Inc. rose $3.4375, to $69.6875.

The Dow briefly rose above 8,500 yesterday for the first time since Aug. 27. Even though the major indexes gained, only 78 stocks rose to 52-week highs on the New York Stock Exchange, while 306 fell to lows for the period.

Eleven years ago yesterday, the Dow plunged 508 points, or 22.6 percent, its biggest decline. Since then, the Dow has increased almost fivefold, not counting dividends.

Bank shares gained yesterday for a third day, led by BankAmerica Corp. up $3.25, to $52.875, and Bankers Trust Corp., up $3.375, to $54.75.

Even J. P. Morgan rose, up $3.375, to $92.875, after the fourth-largest U.S. bank reported profit from operations of 58 cents a share, below the average 81-cent estimate from analysts. Investors were relieved that things weren't worse, amid forecasts that ranged from as little as 6 cents a share to as much as $1.35.

J. P. Morgan, down 37 percent from its April high, accounted for one-quarter of the Dow's gain yesterday. Institutional buyers have been pouring money into J. P. Morgan since late August, according to an analysis of money flow that compares purchases of a rising stock with sales when it falls.

Computer-related stocks rallied as investors anticipated better-than-forecast earnings growth and bullish comments about coming quarters from companies when they report their third- quarter earnings this week.

International Business Machines Corp. rose $3.4375, to $139.375, and EMC Corp. gained $2.75, to $58.125.

Until the past few weeks, investors thought "things were going to hell in a handbasket and they were only going to get worse," said Gary Helmig, an analyst with SoundView Financial Corp. Now, "people think there are lot of cheap tech stocks out there."

IBM, which has seen its revenue sliced for nine consecutive quarters by the strong dollar, is expected to benefit in coming quarters from U.S. currency's weakness, Helmig said.

Retail shares gained on optimism that consumers will keep spending in the coming year. Analysts say consumers are holding up the U.S. economy as demand for U.S. goods slows in Asia.

Some investors are concerned that the Fed's rate cut was a sign that world growth is slowing more rapidly than expected.

"When [Fed Chairman Alan] Greenspan cut rates, that was a bad sign," said Isabelle Cohen Solal, who helps manage $8 billion of international equities at Etoile Gestion in Paris. "That means we're in trouble." She's not buying U.S. stocks.

Other investors say stocks will benefit from falling rates. "There's an old rule of thumb that you don't fight the Fed," said Art Micheletti, investment strategist at Bailard, Biehl & Kaiser Inc., which oversees about $1 billion. "We've had two easings, and I think there will be more coming."

Pub Date: 10/20/98

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