News of European interest rate cuts and strong U.S. economic growth sparked a broad rally in stocks Tuesday, with the Dow Jones industrial average posting a 40.45-point gain on moderately heavy volume.
The 2.1% rise, which boosted the widely watched average to 1,963.53, spurred hopes of further interest rate cuts and greater economic cooperation among the Western economic powers.
However, some experts still expressed doubts about a sustained stock rally, saying that many investors remain pessimistic following last month's crash and still harbor fears of a recession and a weaker dollar.
Stocks, in fact, finished below their highs for the day, pulling back from a gain of nearly 60 points after bond prices and the dollar weakened in late trading to close below Monday's levels.
Tuesday's performance in the Dow "was a sign of confidence," said Ralph Acampora, technical analyst with Kidder, Peabody & Co. "But the pain's still there. You're not going to wash it away that quickly."
Tuesday's gain, however, was encouraging as it came on New York Stock Exchange volume of 199.52 million shares, up from 143.16 million on Monday, the weakest volume since the Oct. 19 market crash. Also encouraging was that gaining issues outpaced losers by more than a 2-to-1 margin on the NYSE.
The catalyst for the rally was news that West Germany, followed by France and the Netherlands, announced cuts in central bank rates. Those moves were a direct response to last Friday's agreement by U.S. officials to cut the budget deficit by $76 billion during the next two years. The European cuts helped remove some of the pessimism surrounding that accord from analysts worldwide who said it did not go far enough in cutting the massive U.S. deficit.
Lower interest rates overseas, long requested by U.S. officials, could spark stronger economic growth abroad, which in turn would increase demand for U.S. exports. That would help reduce the bloated U.S. trade deficit and stabilize the shaky dollar. Lower rates abroad also would reduce pressure on U.S. interest rates and would make U.S. stocks and bonds relatively more attractive to foreigners.
However, analysts said, investors are looking for bolder steps. Central banks of West Germany, Japan and the United States must still cut their all-important discount rates charged to commercial banks, analysts noted. Hopes that West Germany would cut its discount rate, now at 3%, were dampened when a central bank official of that nation charged Tuesday that the United States was not cutting its budget deficit enough.
"We didn't get much from abroad," said Jeffrey M. Applegate, chief investment strategist at E. F. Hutton. "But it was better than nothing. If it had been nothing, the market would have been flat to down."
Another boost to Wall Street came from strong overseas markets Tuesday. The Nikkei 225-share market index in Tokyo advanced 150.46 to 22,856.02, while in London, the Financial Times 100-share index jumped 31.4 to 1,689.1.
Also sparking stocks was the Commerce Department's report that the U.S. economy grew at an annual rate of 4.1% in the third quarter, up from the earlier estimate of 3.8%. That news sparked healthy gains in sectors most expected to benefit from a stronger economy, such as paper and forest products, chemicals and transportation. Among paper and forest products issues, Great Northern Nekoosa rose 3 to 41 1/2; International Paper gained 2 3/8 to 40 3/8, and Champion International added 2 to 32 7/8.
E. F. Hutton's Applegate said the strong third-quarter growth will lead to healthy corporate earnings in the current fourth quarter. That, he predicted, will boost stock prices 10% to 15% over the next few months, taking the Dow as high as 2,200.
Several technical analysts--who downplay the effect of interest rates and corporate earnings and instead look at volume and price patterns--said nonetheless that stocks could be on a classic "bear market rally" in which they will recover as much as 50% of their losses between Aug. 25, when the Dow stood at 2,722.42, and Oct. 19, when the average bottomed at 1,738.74. Such a 50% rally followed the 1929 crash and other sharp stock collapses.
Looking to Sell Issues
"There's usually one good rally after a clean-out, and I think we're getting ready to do it here," said Stan Weinstein, editor of the Professional Tape Reader, a Hollywood, Fla., newsletter. He predicted that if the Dow can close above 1,980 anytime in the next two weeks, it will signal a rally to around 2,200.
However, he said, that rally will finally fizzle out, because many shell-shocked investors are looking for higher prices as an opportunity to sell and reduce their exposure to equities.
"Too many people out there are looking to get out of stocks at higher levels," said Peter G. Eliades, publisher and editor of Stockmarket Cycles, a Los Angeles newsletter. "There's too much pressure for selling."
Tuesday's rally was felt broadly, as 1,139 issues advanced, 502 declined and 354 were unchanged on the Big Board. The NYSE composite index rose 1.80 to 137.93.
Large blocks of 10,000 or more shares traded on the NYSE totaled 3,786, compared to 2,288 on Monday.
Among actively traded blue chips, Eastman Kodak gained 5/8 to 48 1/8; General Electric added 3/8 to 45 5/8; International Business Machines rose 1 to 118 1/2, and Exxon increased 5/8 to 40 3/8.
Standard & Poor's index of 400 industrials rose 4.35 to 282.36, while S&P's 500-stock composite index was up 3.40 to 246.39.
The American Stock Exchange market value index rose 4.54 to 248.35. The NASDAQ composite index climbed 3.55 to 316.68.
The Wilshire index of 5,000 equities closed at 2,391.824, up 30.288.