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Dow surges to record high of 3,500 Interest rates drop; rally in gold falters


NEW YORK -- After weeks of being cowed by a troublin economic outlook, stock traders bid up the Dow Jones industrial average yesterday to a record high of 3,500.03 at the end of a wild trading session that saw stocks first fall and then soar.

The rise came as interest rates declined and the rally in gold prices halted.

"We woke up from a nightmare of our own making," said Richard B. Hoey, chief economist and portfolio manager for Dreyfus Corp., arguing that traders had previously overreacted to reports of rising inflation.

The Dow, rising as high as 3,503.07, closed up 55.64 points, after being down more than 20 points in the morning. Other important indexes, like the Standard & Poor's 500 and the Nasdaq composite, also rose sharply but stopped short of record highs. Volume on the New York Stock Exchange totaled 342 million shares, compared with 264 million shares Tuesday.

The Dow is now more than double the level of 1,738.74 to which it plummeted in the stock market debacle of Oct. 19, 1987. Yesterday's record surpassed the old high of 3,478.61, set April 16.

The stock market's sudden reversal seemed to pull in large amounts of cash from money managers fearful of missing a rally and sparked some suggestions that the move might subside soon.

Gold, which had been soaring in recent weeks, helping to spark inflation fears, began the day rising rapidly. But it later fell, with gold for delivery in June ending down $1.80, at $374.20 an ounce.

There was also relief that the Federal Reserve Board did nothing. Afterthe Fed's Open Market Committee met to set policy Tuesday, there were suggestions that it might intervene in the market to push interest rates higher to guard against inflation. Although most Fed watchers doubted that, the evidence that the central bank did not change policy was greeted favorably.

"Common sense caught up with people's readings of the numbers, especially the bad numbers for the Consumer Price Index and the Producer Price Index last week," said Bernard J. Spilko, managing director of Julius Baer Securities, a unit of a large Swiss bank. "People began to realize there was no need to panic over inflation."

The yield on the 30-year bond surpassed 7.05 percent twice in the day before retreating, finishing at 6.97 percent. Short and intermediate Treasury prices also rallied.

For the past 10 weeks, the Dow has languished in a narrow trading range, with a top of about 3,480. It slipped in early April on concerns sparked by Philip Morris, which cut prices of Marlboro cigarettes. That seemed to call into question the value of other big brands.

The Dow fought back after that, only to break again last week in the wake of surprisingly high rises in the government price reports for April, indications that 1993 inflation would be higher than 1992's rate of less than 3 percent.

But the clear evidence of slow economic growth, persistent unemployment and weak bank lending seemed to contradict the higher-inflation outlook, despite reports that some Federal Reserve officials had advocated higher interest rates to combat inflation.

"This was a session in which the market was at first stunned and then enthralled," said Eugene E. Peroni, director of technical research at Janney Montgomery Scott, a brokerage firm in Philadelphia.

The Dow fell sharply in early trading after the release of discouraging government data on the nation's trade deficit. The Dow fell to a low of 3,415.88 shortly before 11 a.m.

Then traders took their cue from the falling price of gold.

"Money managers began to fear they were about to miss out on a major rally, so they dived in," Mr. Peroni said. With the yield on bonds falling to 7 percent, that also meant that stocks seemed an attractive place to invest, he added.

The Standard & Poor's 500 closed up 7.25 points, at 447.57, and the Nasdaq composite index closed up 9.65, at 690.43. The American Stock Exchange market value index advanced 1.70, to 429.92.

On the New York Stock Exchange, the composite index closed up 3.33, at 246.86, and advancing stocks outnumbered losers by about 11-to-7.

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