As rates drop, stocks rise Dow up 13 MARKETS


NEW YORK -- Stocks rallied yesterday, as falling long-term interest rates prompted investors to overlook signs of economic weakness.

The Dow Jones industrial average climbed 13.97 points, to 3,567.42, settling just shy of its all-time closing high of 3,567.70, set Monday.

Broader market averages also advanced. The Standard & Poor's 500 Index jumped 3.05, to 450.24. The Nasdaq Combined Composite Index rose 1.65, to 707.23, thanks to strong earnings from Microsoft Corp. and Sun Microsystems Inc.

On the New York Stock Exchange, advancing common stocks outnumbered declining issues by a margin of about 5-to-3. Trading was brisk, with about 267 million shares changing hands.

"Interest rates continue to fall, and that's the driving force behind the stock market," said Richard Meyer, head of institutional trading at Ladenburg, Thalmann & Co.

Lower interest rates are viewed as positive for stocks because they encourage investors to move money out of low-yielding fixed-rate investments and into the stock market.

The yield on the 30-year Treasury bond tumbled 8 basis points, to 6.57 percent. Yields dropped after the Commerce Department reported that the economy expanded at a rate of 1.6 percent in the second quarter, short of the 2.2 percent pace projected by economists.

The Dow surged as much as 26 points yesterday, to 3,579.43, before dropping as low as 3,551.77. The surge was led by AlliedSignal Inc., which jumped $2.50, to $71.375, on better-than-expected second-quarter earnings. AlliedSignal rose to a 52-week high of $71.625 during the day.

The gain in the Dow was tempered by weakness in shares of Aluminum Co. of America and by computer-guided sell orders. Alcoa, which has rallied in recent days, closed down $1.875, to $71.75, amid gloom generated by meager growth in the gross domestic product.

"The short-term positives of lower interest rates are boosting the market, but the weakness in the economy is giving me concern," said Anthony Dwyer, chief investment strategist at Sherwood Securities. The GDP figure, Mr. Dwyer said, shows that the economy remains sluggish.

Considering the magnitude of yesterday's drop in long-term interest rates, "the rise in the Dow and the broader indexes should be a lot bigger than it is," Mr. Dwyer said.

In addition, although GDP growth accelerated from the 0.7 percent clip of the first quarter, "the economy remains mired in a slow-growth rut," said Gary Ciminero, chief economist at Fleet Financial Group.

"That's not good news for investors, who have been looking for a strong recovery accompanied by big gains in corporate earnings," said Barry Berman, head trader at Robert W. Baird.

The weak GDP figure compounded disappointment after Germany failed to cut its key discount rate. The German central bank, the Bundesbank, chose to trim the less important Lombard rate, to 7.75 percent, from 8.25 percent.

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