NEW YORK -- U.S. stocks gained yesterday as economically sensitive paper, retail and railroad companies surged amid expectations of a prolonged expansion.
"If the economy is going to pick up next year because [the Federal Reserve Board] is going to start cutting rates this year," said Philip Orlando, money manager at First Capital Advisers, "then I want to be on board with cheap, economically sensitive stocks that are going to have an earnings re-acceleration next year and beyond."
Metal company Aluminum Co. of America, construction equipment maker Caterpillar Inc., auto parts maker AlliedSignal Inc. and International Paper Co. accounted for much of the advance yesterday, the last day of the second quarter.
The Dow Jones industrial average ended 5.54 points higher, at 4,556.10, bringing the gain in the second quarter to 398.41 points, or 9.58 percent, the best since 10.64 percent in the first quarter of 1991.
The Standard & Poor's 500 index rose 0.88, to 544.75, making the quarter's 44.04 point, or 8.8 percent, advance the best since 9.02 percent in the first quarter of this year.
The Nasdaq composite index jumped 6.64, to 933.45, fueled by gains in Microsoft Corp., MCI Communications Corp., Tellabs Inc. and Tele-Communications Inc. In the quarter, the Nasdaq surged 116.23 points, or 14.2 percent, the most since 16.06 percent in the fourth quarter of 1992.
The American Stock Exchange market value index climbed 3.81, to a record 500.19, the first time it topped 500. The Wilshire 5,000 index added 15.66, to 5,348.77, and the S&P; 400 midcap index advanced 0.57, to 197.37.
More than two stocks rose for every one that fell on the New York Stock Exchange, where trading totaled 311.7 million shares in advance of the Independence Day holiday.
Also giving economically sensitive stocks a boost was demand for shares on the last day of the quarter. As of June 29, only 249 of 1,729 diversified equity mutual funds tracked by Lipper Analytical Services Inc. had outperformed or equaled the return of the S&P; 500. That meant a lot of money managers were searching for stocks that might offer high returns through the balance of the year.
Stocks would have posted even larger gains if not for a late selloff in technology stocks, this quarter's best-performing industry. The American Stock Exchange Computer Technology Index soared 27.1 percent in the second quarter as investors searched for shares of companies whose earnings are likely to grow the fastest this year.
"The technologies sold off a decent amount" at the end of the day after AST Research Inc. said it expected a fiscal fourth-quarter loss and said it will be in default under
certain banking agreements, said William Lord, head trader at UBS Securities. That "hurt the techs a little bit," he said.
AST eased 25 cents, to $15.50; Texas Instruments Inc. dropped $3, to $133.875; and America Online Inc. fell $1.125, to $44.
This year investors have seen "no indications of problems in the technology areas," said Ben Zacks of Zacks Investment Research in Chicago. "If any weakness shows up in their earnings reports or their outlook for the rest of the year, it would be a tremendous problem for the market," since "technology has definitely been the market's leading sector."
Sliding oil company stocks also hurt the market's performance. The stocks reacted to a drop in crude oil prices to almost a six-month low. Texas oil for delivery in August dropped 15 cents a barrel, to $17.40.
Mobil Corp. dropped $1.25, to $96; Exxon Corp. fell $1.375, to $70.625; and Texaco Inc. declined 87.5 cents, to $65.625.
Concern that the Federal Reserve won't lower interest rates as fast as some investors expected further limited yesterday's gains, traders said. Stocks are trading near record highs on the bet that rates will fall.
Investors are seeing a "slowing momentum in the economy, which will result in a slower momentum in earnings," said Alfred Kugel, chief investment strategist at Stein Roe & Farnham in Chicago. Investors "are going to have to look hard for companies with special factors or that are in growth areas."
A battery of economic reports released yesterday did little to improve the chances the Fed will lower interest rates next week. While a number of purchasing management associations said business is fading, other reports showed an increase in business confidence in June and rising factory orders in May.
"There's no better than a 50-50 chance" that the Fed lowers interest rates when its policy-making panel meets July 5-6, said Michael Lenahan, head of U.S. equity trading at James Capel & Co.