Closing Market Report

Star-Bulletin news services

Monday, August 23, 1999

Dow chalks up
record ahead of
Fed meeting

Optimism grows that only one more
rate hike is in the cards for '99

NEW YORK -- The Dow Jones industrial average rose to a record on optimism the Federal Reserve won't boost interest rates beyond the quarter percentage point expected at tomorrow's policy meeting.

The Dow was up 199.15, or 1.79 percent, to close at 11,299.76, easily surpassing its July 16 record close of 11,209.84. With today's gains, the Dow is up 23 percent for the year. J.P. Morgan & Co. led today's Dow advance.

The Standard & Poor's 500 index and Nasdaq composite index also climbed for a second straight day as drug and computer-related shares including Pfizer Inc. and Microsoft Corp. rose.

The Standard & Poor's 500 rose 23.61, or 1.7 percent, to 1,360.22, and the Nasdaq composite gained 71.24, or 2.69 percent, to 2,719.57.

Advancers beat decliners by a 4-to-3 margin on the New York Stock Exchange, with 1,706 up, 1,252 down and 560 unchanged. NYSE volume totaled 679.40 million shares vs. 663.73 million Friday. The NYSE composite index gained 10.87 to 634.81; the American Stock Exchange index advanced 4.72 to 792.51; and the Russell 2000 index of smaller companies rose 2.87 to 437.25.

"Stocks are gaining as fear of higher and higher interest rates is waning," said Howard Kornblue, a money manager for Phoenix-based Pilgrim Capital Corp., which oversees $7.4 billion. "People are anticipating we'll get a rate hike but not another one soon."

A wide range of stocks rose today, from fledgling Internet companies to multinational consumer companies.

"There is a legitimate, strong demand to own stocks," said Scott Bleier, chief investment strategist at Prime Charter Inc.

Still, the market's rally surprised some analysts who had predicted a quiet, lackluster session ahead of the Fed's meeting tomorrow.

In an effort to contain inflation, the central bank is widely expected to raise short-term interest rates a quarter-percentage point, following an increase on June 30.

Since higher interest rates can cut into corporate profits, stocks have faltered since the Fed first raised the possibility of a second rate increase. In recent sessions, however, stocks have edged back toward record highs as the market absorbed the likelihood of higher rates.

Stocks are also benefiting from a growing belief that the Fed may hold steady after a modest increase tomorrow.

"Overall, we expect a very solid summer rally based on very positive earnings reports and growing investor confidence that future Fed hikes will likely be moderate," said John H. Shaughnessy, chief investment strategist at Advest Inc.

The Dow's gains today were broad-based, but driven primarily by financial and technology companies. Financial services companies like J.P. Morgan are especially sensitive to interest rate fluctuations. Higher rates make companies less likely to borrow money, cutting into lending volume and potentially slowing the pace of mergers and acquisitions.

Internet stocks were buoying the Nasdaq. and Yahoo rose. Many of those stocks have been driven down recently by concerns over interest rates as their high prices and often weak earnings drove investors in search of more guaranteed investments.

The 30-year bond, meanwhile, rose 5/32, or $1.56 per $1,000 face amount, to a price of 102 2/32. Its yield fell 1 basis point to 5.98 percent, the lowest level since July 22. Yields on two-year notes rose 1 basis point to 5.64 percent.

Bloomberg News and the Associated Press contributed to this report.

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