NEW YORK — NEW YORK -- U.S. stocks overcame early losses to close higher yesterday, buoyed by a rally in the government bond market along with better-than-expected March sales from the nation's largest retailers.
The rally in bonds touched off computer-guided buy orders for stocks shortly before the close as concern about another rate increase by the Federal Reserve eased, traders said. Retail shares such as Wal-Mart Stores Inc. paced the stock market's gains.
"A certain level of comfort has come back to both markets," said Thomas Gallagher, head trader at Oppenheimer & Co. "People feel it will be awhile before the Fed tightens again."
The Dow Jones industrial average rebounded from a 21.6-point loss to close 13.53 higher, at 3,693.26. The Standard & Poor's 500 Index recouped a 1.67-point decline to finish up 2.83, at 450.88.
A rally in Sun Microsystems Inc. helped the Nasdaq composite index advance 4.45, to 755.17, outdistancing the other two major measures. Sun Microsystems climbed $3.125, to $25.375, on third-quarter earnings that beat investor expectations. Analysts at CS First Boston and Merrill Lynch & Co. raised their investment opinions of Sun.
Eleven stocks rose for every six that fell on the New York Stock Exchange. Trading was moderate, with about 289 million shares changing hands on the Big Board.
Stocks, mixed for most of the day, turned higher late in the afternoon as bonds climbed amid a rally in mortgage-backed securities and speculation that the Fed purchased Treasury notes.
"The focus is still on interest rates, so any upward move in the bond market is going to help stocks," said Ronald Doran, director of institutional trading at C. L. King & Associates Inc.
Rates declined yesterday morning after the Labor Department said the number of Americans filing initial jobless claims rose 6,000 last week, the first gain since the beginning of March and more than economists had estimated.
The yield on the benchmark 30-year government bond dropped as low as 7.20 percent yesterday, from 7.25 percent Wednesday, after the claims figures were released. Later, the yield rose as high as 7.27 percent amid a stream of reports showing U.S. department stores and discount chains enjoyed double-digit sales in March.
Stocks later recovered as interest rates tumbled yet again, and the 30-year bond closed trading in New York with a 7.21 percent yield.
The retail sales gains, coupled with Wednesday's report of a nearly20 percent increase in U.S. vehicle sales and last Friday's news of robust March job growth, revived concern about a rate increase. That's because they suggested the U.S. economy grew at a faster rate in the first quarter than the 3 percent annual pace most economists forecast, traders said.
Faster growth may prompt the Fed to raise interest rates a third time this year to combat inflation. The Fed raised the interest rate on overnight bank loans, or federal funds, twice in 1994, bringing the perceived target to 3.5 percent.
"There's still a lot of nervousness about rates spiking up," said Edward Laux, head trader at Kidder, Peabody & Co. Rising rates are worrisome for stock investors because they tend to make fixed-rate investments more appealing.
Investors are now waiting to see whether the recent signs of strength in the economy will be confirmed by first-quarter earnings, slated for release starting next week, traders said.
"Earnings better be spectacular, or we're going to be in for some disappointments," said Richard Meyer, head of institutional equities trading at Ladenburg, Thalmann & Co.
Retail stocks led the gain in the S&P; 500 yesterday. Shares of Wal-Mart rose 87.5 cents, to $26.75, after the nation's biggest retailer posted a 20 percent rise in March sales from stores open at least one year.