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Dow Soars 330 on Rate Cut by Fed

October 16, 1998|From Times Wire Services

U.S. stocks and bonds surged after the Federal Reserve Board cut key lending rates to calm financial markets and keep credit from drying up, reassuring investors the economy isn't headed for recession.

American Express led the Dow Jones industrial average to its third-biggest point gain ever.

The Dow average rose 330.58 points, or 4.2%, to 8,299.36. The Nasdaq composite index rose 70.04 points, or 4.6%, to 1,611.01, capping its best five days on record. General Electric and Microsoft led the Standard & Poor's 500 index up 41.96 points, or 4.2%, to 1,047.49. Almost four stocks rose for every one that fell on the New York Stock Exchange, in trading of 937.6 million shares, the sixth-busiest session in history.

In the fixed-income market, two-year notes, those most sensitive to Fed policy, rallied, driving yields down 0.27 percentage point to 3.81%, the biggest rally since June 13, 1995. The yield on the bellwether 30-year Treasury bond fell to 4.97% from 5% on Wednesday.

The dollar fell against major currencies after the rate cut. It fell to 116.75 Japanese yen from 118.98 on Wednesday.

The Dow industrials jumped to their highest level since Aug. 27 after the central bank unexpectedly cut the overnight bank lending rate by a quarter of a percentage point to 5%.

Financial stocks led the gains.

Lower interest rates benefit these companies as they make the cost of doing business cheaper and boost demand for loans and credit. American Express rose $7.63 to $88.50, J.P. Morgan climbed $5.63 to $92.25, and Citigroup soared $4.19 to $39.81.

The Bloomberg Wall Street index of 20 securities firms soared 10.2%--its biggest gain since the index was created in 1994.

Computer-related shares were the second-best performing group after the Fed's rate cut. Microsoft gained $5.25 to $105.44 and Oracle rose $1.06 to $26.75.

Ahead of its strong earnings report after the close of trading, Sun Microsystems rose $2 to $48.81.

Freddie Mac, the country's second-largest mortgage home financier, rose $1.69 to $51.69 after reporting quarterly net income of 58 cents a share, matching estimates.

Overseas, Tokyo's Nikkei stock average fell 0.1%, Frankfurt's DAX index rose 1.9% and London's FT-SE 100 rose 0.4%.

Some investors and analysts cautioned against reading too much into the rally.

"If tomorrow is a down day, it would suggest this is a flash in the pan," said Philip Roth, chief technical market analyst at Morgan Stanley Dean Witter & Co. "But if tomorrow looks like today, it would suggest a new bull market."

Others warned that earnings reports will hurt stocks more than they help no matter how often or much the Fed cuts interest rates.

"We'll continue to have a tug of war with interest rates buoying the market, and earnings pushing it down," said W. Shannon Reid, a money manager with First Union's Capital Management Group, which oversees $50 billion.

Furthermore, some analysts warned that the rally may have set the market up for a big fall as investors realize that the immediate impact of the Fed move is limited.

"This market is going to go from oversold to overbought very quickly," said Larry Rice, chief investment officer at Josephthal & Co., noting the huge gains by popular names like Microsoft.

"The valuations on the big names are going to get excessive very quickly," said Rice, asserting that the Dow's advance comes as analysts continue to reduce their profit forecasts. "We'll sober up after a couple of days. We'll sober up tomorrow after this monster jump."

Market Roundup, C7

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