NEW YORK -- U.S. stocks, fueled by automobile, machinery and bank shares, extended a seven-month rally yesterday as investors decided the Federal Reserve will lower interest rates -- if not this week, then later this summer.
The Dow Jones industrial average surged past 4,600 for the first time, closing 30.08 higher, at a record 4,615.23, just four months after reaching 4,000. Since the stock market rally began at Thanksgiving, the Dow industrials have returned 27.1 percent. The average has also set 41 records this year.
"There's a perception, or a hope, that the Federal Reserve is going to ease" credit policy, said Jim Benning, a trader at BT Brokerage, a unit of Bankers Trust New York Corp. In any event, "it looks like the economy is getting a little bit stronger, or at least won't fall off a cliff, so the outlook for the stock market is pretty rosy."
A meeting of the Fed's policy-setting Open Market Committee started yesterday and continues today.
Higher prices for makers of machinery and basic materials like paper, chemicals and metals reflected the fact that while the U.S. economy is slowing down, economies in Europe are "early in their" expansions, said Grace Messner, money manager in charge of $800 million at Wilmington Trust Co.
Xerox Corp., for example, added 87.5 cents, to $120.375, after executives at the photocopier told professional investors in Philadelphia and Chicago last week that demand remains strong in Europe. Salomon Bros. analyst Jonathan Rosenzweig projects that Xerox earned $1.90 in the second quarter, up from $1.31 last year.
Meanwhile, the economic outlook is brightening in the United States after growth slowed in the first and second quarters, Ms. Messner said. "The economy will probably right itself and grow again" later this year. "If it slows down any more, [the Fed] will do more" to cut rates.
Economically sensitive stocks whose growth is tied to economic ups and downs climbed, while defensive consumer stocks declined yesterday. For instance, Bethlehem Steel Corp., Goodyear Tire & Rubber Co. and heavy-machinery makers Ingersoll-Rand Co. and Caterpillar Inc. all surged.
"Those are the companies that benefit most quickly from a cut in rates," Mr. Benning said. "They may decide to build an additional factory if they can borrow money more cheaply. Industrial companies get the immediate kicker" of lower rates.
Metals companies such as Aluminum Co. of America, Phelps Dodge Corp., Inco Ltd., Reynolds Metals Co. and Maxxam Inc. also rallied.
The Morgan Stanley Cyclical Index of 30 stocks moved up 5.16, to a record 341.8, while the Morgan Stanley Consumer Index shed 1.37, to 246.04.
Ford and Chrysler reported higher U.S. auto sales in June as consumers took advantage of buyer incentives, while GM cut costs by offering earlier retirement to salaried workers.
Bank stocks swelled as stable interest rates suggested profits from trading and demand for loans will stay high.
BankAmerica Corp., also on Smith Barney's recommended list, gained $1.25, to $54.25; J. P. Morgan & Co. gained $1, to $71.25; and Bankers Trust New York Corp. jumped $2, to $63.25.
Computer-related stocks rose. Tech stocks were "the hottest-acting group for the first half of the year," and many professional investors still have a disproportionately small share in their portfolios, said Arnold Owen, managing director for trading at SoundView Financial Group in Stamford, Conn. With the demand for high-technology goods still strong, he said, "Why not put your money where the growth is?"
Applied Materials Inc. leaped $1.75, to $87.50; Novellus Systems Inc. gained $1.50, to $68.75; and BMC Software climbed $2.75, to $78.75.