Dow climbs 31.71, to highest close since March 24 VTC

NEW YORK — NEW YORK -- U.S. stocks surged yesterday to their highest close since March 24 as a rally in the bond market signaled inflation wasn't increasing and interest rates would remain stable.

"Inflation is not the problem that the bond market has perceived it to be," said Dale Tills, manager of institutional equities trading at Charles Schwab Corp. "It's still running at a fairly reasonable rate."


A Labor Department report yesterday showed that Americans' cost of living rose 0.2 percent in May, less than expected. The report eased concern that Federal Reserve officials would raise interest rates when they meet in July.

That sent U.S. bond yields lower for the first time in three days. The yield on the benchmark 30-year bond fell to 7.30 percent, from 7.35 percent Monday.


Stocks advanced as bonds rallied. Shares of auto and semiconductor companies led the gains as investors bet second-quarter earnings would be better than expected.

The Dow Jones industrial average rose 31.71, to 3,814.83, its highest close since it reached 3,821.09 on March 24. Gains in Caterpillar Inc., AlliedSignal Inc. and General Motors Corp. paced the advance.

For a second day, shares of companies sensitive to the direction of the economy gained. Morgan Stanley & Co.'s cyclical index rose as much as 4.27 before closing at 303.28, up 3.78. It was the highest close since April 7. Caterpillar, a maker of construction equipment, surged $3.375, to $109.375.

Among broad market measures, Standard & Poor's 500 index jumped 3.27, to 462.37, its highest since March 24. The Nasdaq combined composite index added 4.28, to 735.98, led by shares of Intel Corp., Cisco Systems Inc. and Microsoft Corp.

Advancing issues outpaced decliners by about four to three on the New York Stock Exchange, where 291.3 million shares changed hands as of 4 p.m. It was the most active day of trading on the Big Board since May 20.

"People believe there's a little bit more sustainability in the economy's growth" with low inflation, said Jay Ferguson, analyst at Ferguson, Andrews & Assoc. in Charlottesville, Va. "There's no big bops that might knock it off course."

Concern that inflation is poised to revive had roiled stocks and bonds in the United States and Europe in recent months. Rising inflation erodes the value of the fixed yield on bonds. In turn, rising yields make stocks a relatively less attractive investment.

So far this year, consumer prices are growing at an annual rate of 2.3 percent, down from 2.7 percent for all of last year. The Fed has raised the rate on overnight bank loans four times this year, for a total of 1.25 points, in an effort to contain any rise in inflation.


Shares of automakers got a boost after Salomon Bros. raised its estimates for Ford and Chrysler's second-quarter earnings. Ford jumped $2.375, to $61.25; Chrysler soared $1.375, to $49.875; and General Motors Corp. ended up $1.50, to $53.625.

In addition, General Motors won an appeal of a record $105 million judgment, which stemmed from a 1989 death that occurred when a GMC pickup truck burst into flames after colliding with another vehicle.

Semiconductor shares rallied after National Semiconductor Corp. reported late Monday a 78 percent rise in fiscal fourth-quarter earnings. The company earned 63 cents a share, 10 cents better than analysts' expectations.

Intel's shares rose $1.75, to $61.25; Texas Instruments Inc. surged $2.875, to $79.75; Motorola Inc. gained $1.375, to $47.50; and Micron added 87.5 cents, to $34.25.

Exxon Corp. fell 75 cents, to $58.875, and was the biggest loser in the Dow Jones industrial average. A federal jury ruled Monday that the oil company acted recklessly in the nation's largest oil spill five years ago in Alaska's Prince William Sound.