YOU ARE HERE: LAT HomeCollections

Soothing Inflation News Sends Stocks Soaring

Markets: Dow jumps 174.78, bond yields plummet as reports show U.S. prices in check.


NEW YORK — Stocks surged and bond yields tumbled sharply Tuesday, as government reports showing almost zero inflation and a still-expanding economy sparked a nearly 175-point jump in the the Dow Jones industrial average.

Consumer prices rose only 0.2% last month--despite a sharp increase in energy prices--because of offsetting declines in the cost of apparel, new and used cars and private and public transportation, the Labor Department reported Tuesday.

The so-called core consumer price index, which excludes volatile food and energy prices, edged up just 0.1%. Since August 1996, the core CPI is up 2.3%, the smallest rise for a 12-month period in more than 31 years.

Meanwhile, the Federal Reserve reported that its index for industrial production, which tracks output of the nation's factories, mines and utilities, increased 0.7% last month after a 0.4% rise in July.

A third report, showing business inventories rising 0.2% in July after increasing 0.7% in June, was taken as a sign that the economy may not grow as fast in the second half of the year as it did in the first.

The news buoyed Wall Street's confidence that the Fed will refrain from raising short-term interest rates, which could dampen the corporate profits that fuel stocks. The Fed meets Sept. 30.

The Dow Jones industrial average--highly volatile this summer--jumped 174.78 points, or 2.3%, to 7,895.92, as institutional investors poured money back into many brand-name stocks.

New York Stock Exchange volume soared to 642 million shares, the highest since mid-July.

The bond market had its biggest one-day rally in more than three years, with the benchmark 30-year U.S. Treasury bond rising $21.25 per $1,000 of face value. The bond's yield, which moves in the opposite direction from the price, plunged to 6.40% from 6.57%.

Many stock-market investors had seen 6.50% on the T-bond as a psychological threshold, said Richard Cripps, chief investment officer for Legg Mason in Baltimore. When the yield moved so decisively below that level, it was an all-out buy signal, he said.

The Dow's big gain was a bit of a reversal: For the last few months, smaller stocks had been outperforming blue-chip issues.

Spooked by the high prices of some major multinational stocks, investors had been taking a sharpshooter approach, targeting smaller shares that appeared overlooked and underappreciated.

While the Dow bounced erratically through mid-August and early September, the Russell 2,000 index of small-company stocks cruised smoothly to new highs. That has been good news for holders of mutual funds that favor smaller, "growth"-company stocks.

On Tuesday, however, market players put down their rifles and went to the bazooka.

Institutions such as insurance companies and pension funds reacted to the good news on inflation by buying big-name stocks almost indiscriminately. NYSE gainers outnumbered losers by 3 to 1.

Among blue chips, Procter & Gamble zoomed $7.50 to $142.88 and Chevron leaped $4.50 to $87.06.

A painful exception was Eastman Kodak, which said its third-quarter earnings could slump to half of last year's level because of troubles in its digital-imaging business and intense price competition with rival Fuji Photo Film. Kodak stock plunged $3 to $57, its lowest level in nearly two years.

Other well-known stocks, including Coca-Cola, Gillette and Motorola, also have been pounded recently because of warnings of disappointing earnings in the near term--some related to the strong dollar's depressive effect on profits generated overseas. Polaroid joined that camp Tuesday, saying it expects flat third-quarter profit. Its shares fell $3.31 to $52.

If not for Kodak, the Dow would have easily crossed the 7,900 mark Tuesday. The Dow remains 4.4% below its Aug. 6 record high of 8,259.31.

A broader big-stock measure, the Standard & Poor's 500 index, leaped 25.87 points, or 2.8%, to 945.64 and now is 1.5% below its Aug. 6 record high.

Two other key market indicators hit new highs Tuesday, although their daily gains were not as sharp as the Dow's or S&P 500's. The Nasdaq composite index gained 33.68 points, or 2.1%, to 1,668.60. The Russell 2,000 jumped 5.01 points, or 1.1%, to 445.18.

"This is about as good as it gets," said Jim Collins, chairman of Insight Capital Research & Management in Walnut Creek, Calif., which manages a $1.2-billion portfolio favoring smaller stocks.

When a pension fund has a terrific year in the stock market, its managers tend to get conservative and start looking at Treasury securities, Collins said.

"But now they say, 'Hey, with a 6% yield, who wants bonds?' " he said.

With the Dow up more than 22% so far this year, investors will put up with a lot of volatility before they bail out of stocks, some analysts say. And this has been a volatile year. The Dow has seen more daily price swings of 1% or more this year than in any since 1987.

Los Angeles Times Articles