Strong economy launches stocks

Dow rises 212 points on bright outlook for steady earnings climb

February 23, 1999|By Jay Hancock | Jay Hancock,SUN STAFF

Stocks zoomed higher yesterday on what analysts said was hope for higher earnings, stable interest rates and a continued surging economy.

The Dow Jones industrial average, a widely watched benchmark of 30 big companies, rose 212.73 points, to 9,552.68. That 2.28 percent increase left the Dow less than 100 points shy of its record of 9,643.32, reached Jan. 8.

"The economy has clearly made a very strong turn into the new year," said David Donabedian, a senior vice president for the Baltimore office of Rothschild/Pell Rudman, a Boston money management firm. "The other thing people are looking at is that the bond market has stabilized some. And there are some signs that earnings estimates for 1999 are creeping higher."

Other market indicators also rose in what analysts said was a broad show of strength. The Standard & Poor's 500 index gained 32.92 points, or 2.66 percent, to 1,272.14. The Nasdaq composite index, laden with technology stocks, rose 58.41, or 2.58 percent, to 2,342.01.

Elsewhere on the broad market, the Russell 2,000 index, a benchmark of small-cap stocks, jumped 5.52, to 397.82; the Wilshire 5,000 index soared 270.79, to 11,551.62; the American Stock Exchange composite index advanced 7.46, to 700.03; and the S&P 400 midcap index added 6.37, to 364.95.

The Sun-Bloomberg Maryland index of the top 100 Maryland stocks edged up 0.71, to 182.28.

Two stocks rose for every one that fell on the New York Stock Exchange, where trading volume was 718.5 million shares.

"The economy is getting much stronger," said John F. Snyder III, manager of the John Hancock Sovereign Investors Fund, a Boston-based mutual fund. And even though the economy is robust, "there's probably some anticipation that Greenspan will not increase rates."

Alan Greenspan, chairman of the Federal Reserve, is scheduled to address Congress todayin his semiannual testimony on the economy.

The Fed lowered short-term interest rates last fall and boosted the money supply to prevent international economic weakness from spreading to the United States. It didn't, but the resurgent economy had sparked fears that the Fed might reverse course. Many analysts now think it will stand pat on rates this year.

Higher interest rates hurt stocks by making money more expensive to borrow, blotting up monetary liquidity. A continued flood of liquidity into mutual funds and individual stocks was recognized as potent fuel for the market's rise this year.

The Dow is up 4 percent since Jan. 1, and the Nasdaq composite is up 6.8 percent. As employees with retirement plans and other investors continue to inject money into mutual funds, as they have this year, money managers have few choices for investing it except for stocks.

"As long as you have 130 million people in the United States in the labor force, and as long as the labor force is packed with people who are eligible for 401(k) and 403(b) pension plans, an enormous amount of wealth is going be created," said Daniel E. Wagner, president of Wagner Capital Management Corp., a Baltimore money manager.

Promises of earnings increases are also helping the market.

In part because of Asian economic turmoil, earnings growth at U.S. corporations slowed to a near halt last year, and there were signs that would continue this year. Lately, however, consensus estimates of S&P 500 profit increases for this year have edged up to 5 percent, Donabedian said.

Many investors use profit and long-term profit growth as a key measure of stock value, so higher profits translate into higher prices.

One reason for renewed optimism about profits is renewed optimism about the economy. For example, Bruce Steinberg, chief economist for New York investment house Merrill Lynch, thinks revised statistics will show that the economy grew at a 6.2 percent annual rate in the fourth quarter.

A healthy economy could help corporate profits, especially if it doesn't fuel inflation and doesn't lead to higher interest rates. Inflation is still tame, analysts said.

"If you get interest rates that are 3 percent higher, everybody in the United States will hit the brakes," said Wagner. "In the meantime, they're driving new cars."

A spurt of mergers announced yesterday also fueled the rally, most notably Dominion Resources' agreement to buy Consolidated Natural Gas for $6.3 billion in a stock deal that would create a utility giant with nearly 4 million customers and $8.8 billion in annual revenue. Consolidated closed down $1.0625 at $55.1875, and Dominion Resources fell $2.25 to $40.

Sundstrand Corp. rose $10.25 to $68.25 after United Technologies Corp., maker of Pratt & Whitney jet engines, said it would buy the maker of aerospace and industrial parts for about $4.3 billion and combine it with its Hamilton Standard controls unit. The transaction will be half stock and half cash, for a minimum of $70 a share.

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