NEW YORK -- The Dow Jones industrial average soared to a record high and U.S. stocks rose yesterday as banks and other financial companies gained on optimism that falling interest rates will cause profits to surge.
Shares of investment banks, mortgage companies and other lenders rose as signs that inflation isn't accelerating encouraged hopes that the Federal Reserve will reduce interest rates later this year. When rates fall, consumers and businesses borrow more, and profit margins for lenders expand.
The Dow Jones industrial average rallied 42.27, to 4,747.21, surpassing its previous closing high of 4,736.29 on July 17. It was the seventh gain in eight sessions and the biggest jump since July 25's 45.78 points. Still, the 30-stock average stopped short of its intraday record of 4,754.60 on Aug. 2.
J. P. Morgan & Co., Eastman Kodak Co. and DuPont Co. led the advance.
Among the biggest financial gainers, Federal National Mortgage Association rose $3, to $99, Federal Home Loan Mortgage Corp. gained $1.125, to $67.25; Citicorp rose 50 cents, to $67.50; J. P. Morgan jumped $1.625, to $74.75; and Merrill Lynch & Co. rose $1.25, to $61.375.
Tempering the gains, auto issues and technology stocks slumped. Automakers' shares fell as concern spread that North American operations are sluggish and third-quarter earnings may fall below estimates. So-called cyclical stocks had rallied for two weeks amid optimism that the economy was growing enough to drive corporate profits higher.
Shares of Ford Motor Co. fell $1.125, to $30.875; General Motors Corp.'s stock slid $1.625, to $47.75; and Chrysler Corp. shed 75 cents, to $56.625.
The broader Standard & Poor's 500 index also rose to a record high, climbing 2.6, to 576.51 after falling earlier as auto shares retreated. It was the index's sixth record in a row.
Shares of electrical equipment, oil, beverage and financial companies rose, offsetting the drop in auto, semiconductor and computer issues.
About 14 stocks rose for every nine that fell on the New York Stock Exchange, where about 342.6 million shares traded hands. That's more than the three-month daily average of 337.5 million.
The technology stock-laden Nasdaq composite index was the one popular market gauge to fall, slipping 1.56 to 1,065.00 after reaching a record Monday. A report showing stronger-than-expected demand for semiconductors in August confirmed for some investors that third-quarter earnings will be strong, while others saw it as a sign that sales will fall.
The Nasdaq's drop was its second decline in nine days.
Among broad market indexes, the Russell 2000 index of small capitalization stocks rose 0.66 to a record 315.56; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock exchanges, rose 20.45 to a record 5,764.93; the Amex market value index jumped 3.23 to an all-time high of 553.58; and the S&P; 400 midcap index fell 0.22 to 217.28.
Yesterday's most active stocks in U.S. composite trading were Corporate Express Inc., Imatron Inc., International Business Machines Corp., Intel Corp. and General Instrument Corp.
Optimism about interest rates came after a report that prices paid to factories, farmers and other producers fell 0.1 percent in August -- the third consecutive month without an increase in the inflation rate.
The benchmark 30-year government bond rose about 1.125 basis points, or $11.25 per $1,000 bond, driving its yield down 8 points to 6.5 percent, the lowest since July 6. The yield is a sensitive barometer of inflation expectations.
Stocks could give back some of their gains if today's Consumer Price Index fails to confirm that inflation remains sedate.