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Stocks Rise on Unexpectedly Strong Economic Growth

Markets: Report on gross domestic product sends Dow and Nasdaq higher. Bond prices tumble and yields surge.

April 28, 2001|JAMES F. PELTZ | TIMES STAFF WRITER

Stocks posted another healthy gain Friday--nudging the Dow Jones industrials back into the black for the year--after a report of unexpectedly strong U.S. economic growth emboldened investors to bid prices higher.

But the report also sent bond prices tumbling and their yields surging, raising questions about whether bonds' yearlong rally is over for good, as Wall Street turns its attention back to stocks.

The Dow Jones industrial average jumped 117.70 points, or 1.1%, to 10,810.05, giving the blue-chip measure a 230.20-point lift for the week--its third straight week of triple-digit gains. The average now is up 0.2% for the year, returning to positive territory for the first time since March 8.

The Nasdaq composite index also extended its rebound, climbing 40.80 points, or 2%, to 2,075.68. The technology-heavy index has jumped 26.7% from its low this year of 1,638.80 reached April 4. It's off 16% year-to-date, however.

The Standard & Poor's 500 index rose 18.53 points, or 1.5%, to 1,253.05 and is down 5.1% for the year.

Breadth was strongly positive. Almost two stocks rose for every one that fell on Nasdaq and the New York Stock Exchange. Big Board composite volume was 1.3 billion shares, down from 1.57 billion Thursday.

Stocks drew strength from a Commerce Department report of a 2% rise in the nation's gross domestic product in the first quarter, an increase double what many economists were expecting.

Moreover, the report showed growth in consumer spending and a drop in companies' inventories--which is music to stock investors' ears. Many stocks that swing in tandem with changes in the economy, such as those in heavy industry, retailing and technology equipment, rallied on the news.

Chip giant Intel gained $1.54 to $30.18, General Electric rose 65 cents to $49.95 and Compaq Computer climbed $1.20 to $18.20 a share.

"A stronger economy bodes well for the stock market" and could be a sign that the slump in corporate earnings that has tormented stocks is waning, said Brian Belski, a market strategist at investment firm U.S. Bancorp Piper Jaffray in Minneapolis.

"The stock market is relieved that the world is not coming to an end," said Peter Canelo, U.S. investment strategist at Morgan Stanley Dean Witter in New York. "Computer technology, semiconductors, hardware, software--these areas are sensitive to the growth rate of the economy."

So are bond prices, and they tumbled as the GDP report threw cold water on expectations that the Federal Reserve might cut interest rates again at its meeting May 15. The central bank has lowered short-term rates four times this year to help stimulate the economy.

The price of the Treasury's benchmark 10-year note plunged $11.25 for every $1,000 in face value, while its yield--which moves in the opposite direction of its price--jumped to 5.33% from 5.19% on Thursday. The yield is now the highest since early December.

Despite the first-quarter GDP numbers, there is no Wall Street consensus on whether the economy is really on a renewed, sustainable growth path. Several other indicators, such as jobless claims, show the economy still is sluggish.

Investors will want to see more corporate profit and economic data in the coming weeks before taking substantial amounts of cash out of bonds and putting it into stocks, analysts said.

"It's still too early to tell whether the yield increases in bonds that we saw Friday are enough to make people pull out [of bonds] and get into stocks," Belski said. "However, for the last couple of weeks we've seen some outflows from bond mutual funds."

Stocks also are benefiting because "people are beginning to feel a little more confident that the economy hasn't been going into a black hole," Jay Tracey, chief investment officer at Berger Associates Inc. in Denver, told Bloomberg News.

Even with Friday's gains, Nasdaq had its first losing week in the last three, falling 4.1%. The Dow and S&P 500 both climbed for the third consecutive week, gaining 2.2% and 0.8% respectively.

Among Friday's highlights:

* Retail stocks rallied on the unexpectedly positive economic news, including Wal-Mart Stores, up $1.59 to $52.83, and Gap Inc., up $1.68 to $28.21. Target rose $1.61 to $39.16.

* More companies posted earnings surprises, continuing a recent trend. Invitrogen, for example, rose $4.75 to $66.62 after the maker of materials for genetic research reported unexpectedly strong first-quarter profit.

* Brokerage stocks rose in tandem with the market's rally. Morgan Stanley Dean Witter gained $2.44 to $65.30, and Charles Schwab advanced 85 cents to $20.23 a share.

*

Times wire services were used in compiling this report.

* UNEXPECTED GAINS

Consumer spending helped lift the gross domestic product by 2%. A1

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