Dow soars amid hope for profits

Average at highest since September

Nasdaq gains 3.9%

Belated reaction to Fed cut

Some analysts see rebound in economy by the fourth quarter

May 17, 2001|By William Patalon III | William Patalon III,SUN STAFF

Stocks staged a powerful rally - and the Dow Jones industrial average closed above the 11,000 mark for the first time in eight months - as investors wagered yesterday that an aggressive rate-cutting campaign by the Federal Reserve would soon revive corporate profits.

The Dow soared 342.95 points, or 3.2 percent, to close at 11,215.92, just one day after the central bank slashed short-term interest rates by half a percentage point for the fifth time this year. Yesterday's gain was the fifth-biggest point increase in the benchmark blue-chip index, which is now up 4 percent for the year after being down by as much as 13 percent.

"Obviously, this was in response to the Fed rate cut," said David L. Berman, head of the Berman Financial Group LLC in Timonium. "It was interesting that it was a delayed reaction."

The Dow last closed above 11,000 on Sept. 14, when the index ended the day at 11,087.50. Its highest-ever close was on Jan. 14 last year, when the 30-stock index ended the day at 11,723.

The technology-focused Nasdaq composite index also jumped, rising 80.86 points, or 3.9 percent, to end the day at 2,166.44. The Standard & Poor's 500 index climbed 35.54 points, or 2.9 percent, to close at 1,284.98, as all 11 of that broad index's industry groups gained.

Trading volume was slightly stronger than average. Volume on the New York Stock Exchange was 1.3 billion shares, about 9.6 percent ahead of the three-month daily average. Two Big Board stocks rose for every one that declined.

Market analysts said that falling interest rates were a key ingredient in yesterday's gains: Not only has the newly aggressive Fed cut rates five times, but it also all but said another reduction was in the offing when it reduced rates Tuesday. Investors believe these rate cuts will translate into higher corporate profits six to 12 months down the road. But since stock prices tend to rise ahead of advancing earnings, investors want to climb aboard now to avoid getting left in the dust.

"For [many] money managers, that's the biggest fear: `Am I going to miss the opportunity and get left behind?'" said David A. Citron, a managing director for Carret and Co., an investment advisory firm with offices in Pikesville. "That fear is almost greater than the fear of buying something that goes down. I truly believe that's true."

Some analysts said the Dow's gain was solid evidence of a rebound just around the corner.

"We'll see [an] economic recovery later this year - definitely by the fourth quarter - with profits starting to pick up in the first quarter," said Edgar Peters, chief investment officer of PanAgora Asset Management in Boston. "Stock prices will react before earnings are reported."

History supports that view. According to one study, of the 10 times the Fed has cut interest rates at least four times in a row, stock prices were higher 12 months to 18 months later nine times - with the exception being in 1930, in the depths of the Great Depression, said Robert Mewshaw, president of Van Sant & Mewshaw, a Lutherville-based money management firm.

"The odds are 9 to 1 that the market will be higher" a year to a year-and-a-half out, Mewshaw said.

Helping fuel yesterday's rally were bullish comments about several stocks: software maker BEA Systems Inc., semiconductor-equipment maker Applied Materials Inc. and Krispy Kreme Doughnuts Inc.

BEA Systems saw its stock upgraded by an investment bank. Applied Materials announced that quarterly earnings fell 52 percent, but executives buoyed investors by saying they believe the end of their sector's downturn is in sight. And Krispy Kreme posted profits that beat estimates - Wall Street's favorite recipe for pushing a stock higher.

However, several analysts attributed a good portion of yesterday's rally to a so-called short squeeze, - a situation in which market speculators who bet heavily on a market drop had to "cover" their wager. Short-sellers borrow shares from other investors at prices they believe to be high and then sell them, betting they can replace those shares at lower prices when the stocks fall - pocketing the difference as their profit.

However, since a short-seller's losses are potentially unlimited - a stock can theoretically climb to the sky - those speculators have to scramble and buy back shares to cover their trade whenever a powerful rally appears. When a short squeeze occurs, it can add a tsunami-like force to what might otherwise be only a mild rally in stocks.

"A lot of [yesterday's gains] - especially in the tech area - were probably short-covering," said Gil Knight, a principal with Allied Investment Advisors in Baltimore, who manages the firm's Ark Small Cap mutual fund.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.