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FINANCIAL MARKETS

Fed Sends Dow to New High; Yields Decline

February 01, 1996|From Times Staff and Wire Reports

The U.S. stock market advanced broadly to record highs Wednesday, celebrating the Federal Reserve Board's third cut in interest rates since July.

The day's rally cemented the market's strong performance in January, and historically a rising market in January signals a bullish trend for the entire year, analysts noted.

The blue-chip Dow industrial average, up 164 points in the previous three session in anticipation of the Fed's move, added another 14.09 points to a record 5,395.30 on Wednesday.

The broad market rose more powerfully than the Dow. Winners swamped losers by nearly 2 to 1 on the New York Stock Exchange in heavy trading, and the NYSE composite index gained 0.8% to a record 340.03, compared with the Dow's 0.3% rise.

The bond market also rallied, though short-term Treasury bill yields fell much more sharply than longer-term yields.

Analysts said the Fed's cuts in its key short-term lending rates, including a reduction in the federal funds rate (the overnight loan rate among banks) from 5.5% to 5.25%, was engineered to bolster the anemic U.S. economy.

"The Fed is going to do everything it can to make sure we avoid recession," said Guy Truicko at Unity Management, which manages $1 billion in assets.

And Wall Street, in rallying to new highs, is expressing confidence that the Fed is acting quickly enough to avert recession and that the groundwork is being laid for a stronger economy later this year, experts said.

"The second half of the year will be much better than people are anticipating," predicted Joseph Toms, head of research at Fisher Investments.

Meanwhile, fourth-quarter corporate profit reports have been surprisingly strong, reinforcing the idea that U.S. companies are in terrific shape.

If investors begin to look forward to an economic pickup later in 1996, they may also assume that corporate earnings growth also will rise, further underpinning stocks.

For now, many experts believe that falling money market rates will be the primary catalyst pushing investors into stocks and bonds, in search of higher returns.

The yield on one-year Treasury bills tumbled to 4.90% on Wednesday from 4.97% on Tuesday. Analysts expect money market fund yields and bank CD yields to slide in the weeks ahead.

Indeed, many economists believe the Fed will be forced to ease interest rates even more to help the economy. "This shouldn't be viewed as the last move," said David Capurro, who manages $520 million in bonds at Franklin Resources in San Mateo, Calif.

But some analysts worry that the Fed risks stoking long-term inflationary forces if it continues to ease credit. Perhaps reflecting that concern, long-term bond yields fell just slightly Wednesday, with the 30-year T-bond yield dipping to 6.02% from 6.04% on Tuesday.

"They're [the Fed] losing their resolve on inflation and sending the wrong message" by trimming rates now, argued Andrew Brenner, trader at Nomura Securities International.

Bond traders were also concerned Wednesday by another jump in some key food commodities, including orange juice and coffee. Gains in those commodities helped send the Commodity Research Bureau index of 17 commodity futures up 2.08 points to 247.53, highest since May 1990.

But bullish stock analysts note that commodities are notoriously volatile, and that prices of industrial raw materials have been falling lately even as grain and coffee prices have advanced. Inflation risk from commodities remains low, the bulls contend.

Among Wednesday's highlights:

* Bank, insurance and brokerage stocks led the rally. All benefit from lower interest rates.

Among banks and S&Ls, Wells Fargo gained 5 1/8 to 234 5/8, BankAmerica jumped 2 1/4 to 67 3/8, Mellon Bank rose 7/8 to 52 3/4 and Great Western Financial added 5/8 to 24 1/8.

Among insurance firms, American International Group leaped 3 7/8 to 96 7/8 and Chubb gained 1 5/8 to 103 3/4.

In the brokerage sector, Dean Witter surged 2 1/4 to 54 1/8, Charles Schwab jumped 1 3/8 to 25 1/8 and Lehman Bros. was up 7/8 to 25 5/8.

* Credit card issuers and consumer lenders climbed on expectations that lower interest rates will help stem a rising tide of consumer loan delinquencies. MBNA vaulted 2 to 40 3/4, Household International climbed 2 1/4 to 64 7/8 and American Express surged 1 1/8 to 46.

* Retail stocks also sparked to life. J.C. Penney jumped 2 3/4 to 48 7/8, Sears added 1 1/4 to 41 1/2 and May Department Stores was up 1 7/8 to 44 1/2.

* Transportation stocks jumped. They would benefit from a stronger economy. Federal Express shot up 5 5/8 to 76 1/8, Delta Air Lines gained 1 to 68 3/8 and Norfolk Southern added 1 to 78 7/8.

* In the high-tech sector, Tivoli Systems jumped 9 9/32 to 47 1/32 after IBM agreed to buy the company for $47.50 a share. IBM slipped 1/8 to 108 1/2.

* Helene Curtis plunged 8 1/4 to 58 1/4 as the sale of a large block of its stock touched off panicky selling. Speculators have doubled the value of Curtis' stock recently on rumors that the maker of personal care products may be sold.

* Hasbro lost 2 3/8 to 41 1/2 on views that the toy maker has gained the upper hand in its effort to thwart a merger offer from rival Mattel. Mattel lost 1/8 to 32 3/8.

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