Good news on inflation spurs Dow Industrials end at 5838 as fear of increase in interest rates eases; 'Herd starting to catch on'; Modest gains in sales, retail prices seen as sign economy in check


Buoyed by two government reports that eased fears of an imminent interest rate rise, investors drove Wall Street to new highs yesterday.

The Dow Jones industrial average shattered the 5,800 mark for the first time and hit its first record close in almost four months, closing at 5,838.52, up 66.58 points, for its 22nd record this year. The Dow's prior record close was 5,778.00 on May 22.

The market, which flirted with record highs Thursday, climbed yesterday on reports that the August Consumer Price Index increased only 0.1 percent and retail sales rose by 0.2 percent. The increases were smaller than analysts' predictions, and were seen as fresh evidence that inflation remains in check.

"The market is responding to some surprises, the most important of which is the slowdown in retail sales," said Michael Metz, chief investment strategist with Oppenheimer & Co., a New York-based brokerage firm. "On top of that, the CPI figure was encouraging. The result is that investors have changed their minds about the possibility of the Fed raising interest rates."

The Standard & Poor's 500 index also hit a record close, increasing 9.41 points to 680.54 and edging out the May 24 peak of 678.51. The technology-rich Nasdaq composite index climbed 22.86 to 1,188.67.

The Treasury bond market also rose, with the 30-year bond gaining 1.53 and sending its yield to 6.95 percent from 7.07 percent.

Many analysts had expected the Federal Reserve Board to raise short-term interest rates Sept. 24 to head off inflation.

Higher interest rates are bad news for stocks because they discourage companies from borrowing money, dampen consumer demand and send investors scurrying for interest-bearing securities.

Built-in expectations

Don Hays, director of investment strategy with Wheat First Butcher Singer Inc., a Richmond, Va.-based brokerage firm, said the market built in expectations of a rate hike about a week ago, after a report that the jobless rate had plummeted to a seven-year low of 5.1 percent. It was thought then that the Fed would have to act to head off inflation.

He said the market was responding not only to yesterday's government reports, but to Thursday's report of low increases in producer prices.

The Dow took off yesterday from the moment the exchange opened, and soared to 5,855.16 just after 1 p.m., an all-time high. The previous high during the trading day was 5,796.10 on May 23.

"The herd is starting to catch on that inflation is totally under control," Hays said. "It became obvious that it would be tough for the Fed to raise interest rates."

Metz, Oppenheimer & Co.'s chief investment strategist, said the consensus now is that the Fed will leave rates alone not only at its September meeting, but possibly for the rest of the year.

Andrew M. Brooks, head of equity trading with T. Rowe Price Associates Inc., said the market was following the CPI and bond market, but was helped by other variables. For instance, he said Merrill Lynch had upgraded its intermediate-term rating on IBM from buy to accumulate.

Strong gainers

IBM was among the Dow's strongest gainers, closing up $5.125 at $122.375. Others included Eastman Kodak, Caterpillar, General Electric and Procter & Gamble.

The Nasdaq index jumped on the strength of technology stocks. "Technology stocks have provided a lot of leadership, but recently been out of favor," Brooks said. "It's not unusual for the market to look for groups that have been lagging."

Some analysts said they expected the stock market to stay level over the next few days. "We think the economy is going to have a slowing trend," Hays said. "The bond market will stay strong. The stock market will have sideways movement until the end of November."

Despite yesterday's encouraging news, Metz said he's not bullish. He said commodity prices are high and profit margins are under pressure. "I think rates are going to be pushed up by market forces," he said. He called the market "fully priced and vulnerable to another correction."

Pub Date: 9/14/96

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