NEW YORK -- U.S. stocks rallied yesterday after reports of slower inflation spurred optimism that interest rates will fall further this year and help the economy to regain ground. Shares of banks and retailers led the advance as a big bond rally sent long-term rates plummeting.
The prospect of lower rates was welcomed by investors concerned that corporate profit growth has stalled and taken the fuel from a six-month rally. Falling rates cut borrowing costs and lead businesses and consumers to increase spending.
"The market is a forward-looking mechanism, and it sees a rate reduction coming," said David Aushwitz, president of Arnold Investment Counsel, which manages about $100 million in assets. "The market is a better judge than you and I on the direction of rates -- it sets the pace for the Federal Reserve."
The Dow Jones industrial average rose 38.05, to 4,484.51, just below its record close of 4,485.2 on June 6. It was the biggest one-day rally since an 86.46-point gain on May 31. Boeing Co., International Paper Co., Caterpillar Inc. and International Business Machines Corp. led the advance. So far this year, the 30-stock average is up 17 percent.
Boeing rallied $2.50, to $64.875, after it said Eva Airways and China Airlines, both of Taiwan, sent letters of intent to buy four 777-200s each. The total value of the two orders is $1.12 billion, and comes a week after Boeing won a $4 billion order from Saudi Arabian airline Saudia.
Shares of banking companies advanced amid optimism that falling interest rates will result in more loans and help preserve their profit margins. When interest rates rise, banks must pay more for deposits.
Among banks, J. P. Morgan & Co. gained 75 cents, to $71.125; Citicorp rallied $2.875, to $55.875; First Chicago Corp. jumped $1.125, to $58; Bankers Trust New York Corp. added $1.50, to $62.50; BankAmerica Corp. spurted $1.25, to $52.625; and Wells Fargo & Co. added $2.125, to $179.25.
Broader indexes also gained. The Standard & Poor's 500 index rose 5.17, to 536.05, its biggest one-day gain since a 9.82-point jump on May 31. In addition to banks and retailers, telephone and health care companies gained. Textile issues fell, led by Fruit of the Loom Inc. Its shares slid $3.50, to $23.625, after the company said second-quarter earnings won't meet expectations.
One of the biggest gainers in the index was ITT Corp., whose shares surged $6.25, to a 52-week high of $115.50. The insurance, lodging and industrial products company said it plans to split into three publicly traded companies, ending its reign as one of the nation's biggest conglomerates.
The Nasdaq composite index jumped 6.25, to a record 894.23, its eighth gain in the last 10 days. Shares of Cisco Systems Corp., Tele-Communications Inc., Comcast Corp. and Parametric Technology Co. rose the most.
About 16 stocks rose for every eight that fell on the New York Stock Exchange, where more than 340 million shares traded hands. The three-month daily average is 337.22.
Optimism about interest rates was sparked by two government reports. The Labor Department said consumer prices barely budged in May, while the Commerce Department reported that retail sales rose a weaker-than-expected 0.2 percent in May. Taken together, they sent bonds soaring on the belief that inflation won't accelerate, giving the Fed room to lower interest rates.
The yield on the benchmark 30-year government bond fell 15 basis points to 6.55 percent. As bond yields fall, the return on stocks becomes relatively more attractive and the cost of borrowing drops for businesses and consumers.
"The Federal Reserve will have to aggressively cut rates to come in line with the weakness in the economy," said Robert Robbins, market analyst at Robinson-Humphrey Co. "There's going to be a little more earnings disappointments because of this weakening."