Stocks jumped to record highs and bond yields sank Thursday after the Federal Reserve Board officially cut interest rates for the first time in nearly three years, in an effort to support the faltering economy.
The Dow Jones industrial average shot up 48.77 points to an all-time high of 4,664.00 in extremely heavy trading of 420 million shares on the New York Stock Exchange.
"It was a buying panic," said William Bayer, vice president at PTI Securities.
In the bond market, the yield on the bellwether 30-year Treasury bond tumbled to 6.49% from Wednesday's 6.60%, driving its price up $15.63 per $1,000 invested.
The Fed's rate cut, a quarter-point reduction in its target for the so-called federal funds rate, or overnight loan rate among banks, was the first since September, 1992. But it had been widely anticipated as the economy has slowed significantly this year.
The Fed did not reduce its other key interest rate--the discount rate, which is what banks pay to borrow directly from the central bank--but analysts noted that the federal funds rate is the Fed's principal tool in guiding other market interest rates.
Meanwhile, in afternoon trading today in Tokyo, the Nikkei-225 stock index had jumped 1,069.09 points, or a stunning 7%, to 16,325.98, as investors responded to news that the Bank of Japan will also ease interest rates--which are already at record lows there.
The Japanese central bank said its move was unrelated to the Fed's efforts, but analysts said the combination of falling rates in the United States and Japan could help bolster the world economy. With Japan's economy believed to be back in recession, investors have been looking for any sign that conditions might improve there.
Early Thursday, U.S. financial markets had waffled as some investors began to doubt that the Fed would act. Once the news was released at midday, however, buyers immediately flocked to stocks and bonds in frenzied activity.
The decline in bond yields was dramatic and across the board. The yield on two-year Treasury notes, for example, plunged to 5.52% from 5.78% on Wednesday. The three-month T-bill yield dropped to 5.54% from 5.67%.
Although some of the slide in yields was attributed to "short covering"--buying by traders who had bet that yields would rise instead of fall in the near term--analysts said the bond market reflected investors' expectations for additional Fed rates ahead.
For the stock market, bonds' rally--and the belief that the Fed's action to reduce rates will keep the economy out of recession--was a bullish tonic.
The Standard & Poor's 500 index surged 6.73 points to 553.99, joining the Dow at a record. And the Nasdaq composite index shattered the prior day's closing high by soaring 11.11 points to 952.93.
Gainers outdistanced losers by a large margin, with a late NYSE tally showing 1,686 issues up, 676 down and 650 unchanged.
"The reaction is far greater in the markets than I would have expected," said Hugh Johnson, chief investment officer of First Albany Corp. "The stock market is sending a message that more rate cuts will follow."
Among Thursday's market highlights:
* Industrial stocks rocketing included Alcoa, up 1 3/4 to 54 1/2; Boeing, up 1 5/8 to 64 3/4; Caterpillar, up 2 3/8 to 68 3/8, and GE, up 1 1/4 to 59.
* Technology issues, the market's leaders this year, soared anew amid expectations that earnings of computer and related companies will benefit further from a reviving economy. Micron Technology ended up 2 3/8 to 55, Motorola added 1 1/4 to 70 1/4, IBM soared 2 1/8 to 98 7/8 and Microsoft gained 2 1/16 to 92 3/4.
* On the downside, retailers' stocks attracted attention Thursday as stores reported their June sales.
Ann Taylor fell 3 1/8 to 20 1/2 after the company forecast a second-quarter loss after weak June same-store sales, or sales at stores open at least a year.
Gap fell 2 1/4 to 34 1/4 as analysts cut estimates after the company said June same-store sales fell 4%.
* Gibson Greetings rose 2 to 14 1/2 after the greeting card and wrapping paper company said it is exploring the possibility of a sale after receiving an expression of interest from another firm.
* United Health fell 1 1/8 to 40 1/2, with analysts citing weakness in the health care sector.
* Legato Systems soared 8 to 27 in its first day of trading.
In foreign markets, Mexican stocks soared for a second straight session, with the Bolsa index closing up 96.67 points, or 4.19%, at 2,402.97.
Investors in Mexico cited rising optimism about an economic rebound for the country.
* FED EASES
Central bank cuts key rate. A1
* CLOSELY WATCHED
Rate-sensitive consumers will keenly feel impact of cut. A1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Fed Loosens Its Grip ...
The Federal Reserve Board voted Thursday to trim its targeted "federal funds" rate--the overnight loan rate among banks--to 5.75% from 6%, the first official interest rate cut in three years. The Fed left its other benchmark rate, the discount rate, unchanged.
Federal funds target rate (end of each quarter and latest)
Federal discount rate (end of each quarter)
2nd quarter: 5.25%
Short- and long-term market interest rates have been falling since January, reflecting the weak economy and expectations that the Fed would have to ease credit.
Three-month Treasury bill yield (month-end data and latest)
30-year fixed mortgage rate (month-end data and latest)
Sources: DRI. Researched by JENNIFER OLDHAM / Los Angeles Times