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Dow Soars 257 on Force of Optimistic Economic Report

Stocks: Data indicate economy is not overheating. Gain is biggest one-day surge, but percentage rise sets no record as market valuation has more than tripled in 10 years.


The stock market's Dow Jones industrial average soared to its biggest daily point gain in history on Tuesday as investors--encouraged by an optimistic report on the economy--returned from summer vacation with a new burst of enthusiasm to buy stocks.

The Dow Jones average of 30 blue-chip shares, the best-known barometer of the market, skyrocketed 257.36 points to 7,879.78--easily surpassing the previous one-day gain of 186.84 points set Oct. 21, 1987, when the market was recovering from its 508-point crash two days earlier.

On a percentage basis, Tuesday's 3.4% increase was not even close to record proportions because the market's overall valuation has more than tripled over the past decade. Even so, it also was the average's best one-day percentage gain in 6 1/2 years. Illustrated another way, a typical stock investment grew nearly as much Tuesday as a simple savings account grows in a year.

Trading volume was fairly modest, however, well below the average for the summer. Lower volume implies fewer traders are in the market and can exaggerate price movements.

The rally extended far beyond the famous Dow Jones industrials, cutting a wide swath through all sectors of the market. The surge also left many veteran Wall Streeters scratching their heads, because U.S. and many overseas stock markets--especially Asian markets--had been getting pummeled in recent weeks.

The U.S. market was mostly concerned about excessive economic growth, the risk of higher interest rates and fears the market was simply overvalued; overseas the problem had been worries of an economic slowdown and currency devaluations.

"Today was quite unpredictable given the weakness right up until yesterday," said Eric Miller, chief investment officer of Donaldson, Lufkin & Jenrette Securities Corp. He noted, however, that Asian and other foreign markets also rebounded Tuesday.

Miller and others said the rally provided fresh evidence that, in terms of U.S. stocks, investors remain bullish about the market's prospects, and that U.S. economic growth and interest rates will continue to support higher share prices.

Indeed, one of the rally's sparks Tuesday was a report that manufacturing growth slowed in August, according to a monthly survey of corporate purchasing managers nationwide. That helped renew investors' confidence that the economy is not overheating and that inflation is not spiraling too high.

"It's hard to poke major holes in the bullish [economic] underpinnings of the market, at least over the next few weeks and months," Miller said.

Odd as it seems, investors often fret when the economy is overly robust because, if it lifts inflation too high, the Federal Reserve Board often acts to reverse those trends by raising short-term market interest rates.

And higher rates are usually bad news for stocks, because they raise corporate borrowing costs, erode business profits and make bonds and other fixed-income investments more appealing to investors relative to stocks.

But the report from the National Assn. of Purchasing Management--one of the first signs of how the economy performed last month--helped calm fears of higher rates, and, in fact, it spawned a drop in many market rates Tuesday, which makes bond prices higher.

For instance, the yield on the bellwether 30-year Treasury bond dropped to 6.55% from 6.60% late Friday. (Financial markets were closed Monday for Labor Day.)

"I don't detect that there's been any fundamental shift in peoples' opinions" that economic trends remain good for stocks, said Jeffrey Applegate, market strategist at the securities firm Lehman Brothers Inc.

Those expectations were sorely tested in the latter half of August, when the market pulled back sharply from record heights earlier in the month. For instance, after reaching a historic high of 8,259.31 on Aug. 6, the Dow Jones industrials plunged more than 630 points, or nearly 8%--a tumble that included a startling 247.37-point sell-off on Aug. 15.

Investors' expectations will likely be tested again Friday when a report on unemployment for August is released, especially if the report indicates strong job growth.

"The tone and tenor of Friday's data will dictate the sustainability of today's rally," said Philip Orlando, chief investment officer of Value Line's asset management division.

But analysts said much of the stock market's retreat in late-August also reflected the market's simple need to pause after its big gains earlier in the summer--and investors' desire to take some profits, which induced more selling.

"We went up awfully far, awfully fast in June and July," said Douglas Cliggott, chief investment strategist at J.P. Morgan Securities. "And it's not unusual for the market to take two steps forward and one step back."

Indeed, even though the Dow Jones industrial average and other, broader measures of the market remain below their all-time highs set last month, they're still nicely ahead for the year so far.

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