Stock, bond markets rally as investors cheer news

NEW YORK — NEW YORK -- U.S. stocks soared yesterday after a report showed the economy grew less than expected in the second quarter, easing concern the Federal Reserve will aggressively raise interest rates. Bonds also rallied strongly, sending yields to their lowest level in more than a month.

"This could be the start of a summer rally," said Christopher Willox, a trader at BT Brokerage.


The Dow Jones industrial average staged its biggest advance in more than two weeks, surging 33.67, points to 3,764.50. Shares of International Paper Co., Aluminum Co. of America and Caterpillar Inc. were the biggest gainers.The average added 29.46 this week.

Among broader market indexes, the Standard & Poor's 500 index rallied 4.02 to 458.26. Oil companies, utilities and software makers paced the advance. The index rose 5.15 this week.


The Nasdaq composite index rose 9.73, to 722.16, helped by gains in Microsoft Corp., Intel Corp. and Oracle Systems Corp. For the week, the Nasdaq added 5.10 points.

The Russell 2000 index of small capitalization stocks rose 2.31, to 244.06; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock exchanges, rose 39.48, to 4,519.80.

The yield on the benchmark 30-year government bond fell to 7.39 percent, down from 7.55 percent yesterday, and its lowest yield since June 22. Higher rates make fixed-income investments more attractive than stocks and curtail economic growth, crimping corporate profits.

The rally was sparked by the Commerce Department's report that gross domestic product grew 3.7 percent in the second quarter, less than many economists had expected.

If growth had exceeded expectations, the Fed would be more likely to raise interest rates to head off the inflation that often accompanies economic growth, traders said.

Speculation that interest rates won't rise as much sent the dollar down against most major currencies, although optimism over trade talks buoyed the U.S. currency against the Japanese yen. The dollar closed in New York trading at at 1.5835 German marks, down from 1.5920 marks Thursday, and at 100.00 yen, little changed from Thursday.

"We're still growing nicely, but not overheating," said Leon Brand, global market strategist at NatWest Securities Inc. "Everybody was talking about a 50-basis-point increase if GDP was over 4 percent. Now they're saying maybe we need just 25 basis points, and that's already in the market."

Moreover, the second quarter's expansion was largely a function of rising inventories, the Commerce Department said, hinting at a slowdown in the economy spurred by the Fed's raising rates since February. The Dow industrials are down 5.5 percent since the Fed first raised rates, and the S&P; 500 is down 4.7 percent.


"There is a lot of inventory accumulated in the GDP number," said Todd Clark, senior block trader at Mabon Securities. "That has got the bond guys second-guessing whether the Fed has got to tighten."

Stocks followed bonds sharply higher yesterday after the Purchasing Management Association of Chicago said that manufacturing grew at a slower pace in July than June. The University of Michigan's consumer sentiment index also declined July from the previous month.

Of course, signs of a slowdown in the economy raise concerns that corporate profits have peaked and that future earnings growth will not be as strong.

"We are past the point of real great earnings acceleration," said Geoffrey Brod, who manages $4 billion of equity investments at Aeltus Investment Management. "Earnings growth going forward will be more modest."

Cisco Systems Inc. was the most active U.S. issue, followed by shares of Apple Computer Inc., Intel, Microsoft and Quantum Corp.

Trading was active as 269 million shares changed hands on the New York Stock Exchange, higher than the average daily volume of 251 million shares this summer. Eight stocks rose for every three that fell on the Big Board.