Aided by tumbling interest rates worldwide, the stock market reversed a two-day slide and staged a broad rally Thursday, with the Dow Jones industrial average gaining 40.12 points.
The 2.1% gain, which took the Dow to a close of 1,985.41, sparked renewed optimism among analysts that confidence was returning to the market following last month's historic crash. Some said the current rebound could take the Dow well over the 2,000 mark in the next few days.
However, some analysts noted, Thursday's gain came despite a further plunge in the dollar. The weakening greenback, along with the persistent federal budget deficit and the threat of a recession, could hinder any sustained gains in stocks in the next few months, analysts said. The long-term outlook is still quite treacherous, they said, as investors remain cautious in the aftermath of the 1,000-point fall in the Dow average between Aug. 25 and Black Monday on Oct. 19.
"This is a good short-term rally . . . but we're still in a bear market" and prices could test the Oct. 19 low in the months ahead, said Stan Weinstein, editor of the Professional Tape Reader, a Hollywood, Fla., market newsletter. He said investors should view rallies such as this one as opportunities to sell, not to buy.
"It's a possibility that we've seen the worst," said Ralph Acampora, technical analyst with the Wall Street firm of Kidder, Peabody & Co. "It all will be predicated on what comes out of Washington, and if they don't dillydally around" on the budget deficit and other problems.
Thursday's gain, which reversed a combined 68.80-point decline Tuesday and Wednesday, came on New York Stock Exchange volume of 225.96 million shares. That was up from 202.53 million in the previous session.
Nearly all major groups of stocks enjoyed the rally. Advancing issues outnumbered declines by nearly 3 to 1 on the Big Board, with 1,276 up, 439 down and 291 unchanged. Strong gains were also registered on the secondary issues traded on the American Stock Exchange and the over-the-counter market.
The gain followed sharp drops Thursday in Tokyo and most European stock markets. But rising stocks in New York helped lift prices in London, where the Financial Times 100-share index closed up 30.7 points, or 1.9%, at 1,638.8.
In Tokyo, stocks fell for the third straight day, with the 225-share Nikkei stock average losing 237.83 points in the first 15 minutes of trading today. On Thursday, the Nikkei was off 430.88 points, or 1.9%, to close at 22,629.65.
Those overseas declines staggered the U.S. market in early trading Thursday, but stocks quickly recovered, thanks to interest rate declines and signs of greater cooperation between Western economic powers.
Central banks in West Germany and Switzerland lowered key interest rates Thursday. Numerous U.S. banks then lowered their prime lending rates to 8.75% from 9%, the second such reduction since Black Monday.
Stocks were also helped by rising bond prices. The bellwether 30-year Treasury bond jumped almost 2 points, or $20 per $1,000 of face value, lowering the yield to 8.78% from 8.97% on Wednesday.
The gains in stocks came despite a free fall in the dollar, which came on the heels of statements by Treasury Secretary James A. Baker III that the Reagan Administration would accept a falling dollar in exchange for lower interest rates that could stave off a recession.
The dollar tumbled in late New York trading to a post-World War II low against the West German mark and its lowest point against the Japanese yen since the late 1940s.
But while the Reagan Administration may accept a falling dollar for now as a price of lower interest rates, analysts expressed concern that the weaker greenback would eventually lead to higher interest rates that in turn could hurt stock prices. The falling dollar, by reducing the value of U.S. Treasury bonds, could discourage foreigners from investing in those securities that finance the U.S. budget deficit. That could force the U.S. Federal Reserve to push interest rates back up to make the yields on government bonds more attractive.
Among stocks enjoying gains Thursday were those in drugs, forest products, chemicals and other export-oriented industries that might benefit from a lower dollar.
In the drug group, Merck climbed 6 3/4 to 183; Eli Lilly gained 3 to 77; Abbott Laboratories picked up 3/8 to 49 5/8, and Pfizer rose 3/8 to 53 1/2.
Other gainers in the industrial sector included USX, up 2 to 27 7/8; Dow Chemical, up 3 7/8 to 78 5/8; Monsanto, up 2 3/8 to 69; Weyerhaueser, up 1 1/8 to 37 1/2, and Bethlehem Steel, up to 12 1/2.
However, Exxon declined to 41 3/4 and General Motors lost 1/8 to 60 1/8.
Trading on various exchanges was extended by one-half hour Thursday to 3 p.m. EST as part of a move to return to a normal 4 p.m. close next Monday. The markets had been shutting down early to make time to process the high volume of trades from last month's hectic sessions.