Stock and bond prices surged again Thursday, although bonds retrenched after matching January`s low on the 30-year Treasury bond yield early in the day.
The Dow Jones industrial average, up nearly 52 points Tuesday, added another 45.12 to close at 3379.19. New York Stock Exchange volume was a strong 275.8 million shares, the highest since mid-January during the incredible turn-of-the-year rally. Advancing issues outnumbered losers by nearly 3 to 1 among NYSE-listed stocks.
The broader Standard & Poor`s 500 index and New York Stock Exchange index set new highs Wednesday, convincing many that the rally has staying power. Bonds retreated after a strong opening, closing virtually unchanged from Tuesday with the 30-year Treasury issue yielding 7.43 percent
The explanation for the stock rally, given the absence of upbeat economic news, was fairly simple: On the one hand, lower long-term interest rates reduce the break-even point for long-term corporate ventures, such as real estate projects; on the other hand, investors begin to consider stocks instead of lower-yielding bonds.
”The decline in long-term rates is really the driving force behind what`s happened in the stock market,” said Dick Hoey, chief economist for Dreyfus Corp. in New York. Feeding the advance is the recent record level of short interest in Big Board and over-the-counter stocks, he added. Short sellers, who`ve sold borrowed shares, often rush to buy when it appears they bet wrong on the market`s direction.
Marc Pado, technical market analyst for Mesirow Financial in Chicago, said Japanese and European investors are finding the U.S. financial markets attractive.
With the dollar hovering near post-war lows against the German mark and unlikely to fall much further, European investors can get a double kick out of a rally in U.S. stocks if the dollar also climbs, he said. Japanese investors faced with a weak domestic economic outlook also are looking abroad. Powerful overnight bidding from overseas sent the U.S. bond rally off to a strong start Wednesday, according to David Ader, fixed-income analyst at Technical Data in Boston. The dollar rose in foreign exchange trading Wednesday, propelled by the market rally.
Pado sees another reason to be bullish. Unlike others, including their own depositors, commercial banks can`t buy stocks when interest rates drop. Instead of making loans this summer, bankers have been pouring money into short-term Treasury securities at record levels. But they are wary of chasing yields into long-term Treasuries. Suddenly, bankers may rediscover good old-fashioned business loans, despite the default risk in a weak economy, Pado said. ”This is going to be the topic of the bankers` next meetings.”
Opening the spigot of bank lending to business would accelerate the economic recovery, carrying the stock market higher, Pado believes.
Most active issues Wednesday again included the Big Three automakers, although only General Motors advanced. Eastman Kodak climbed $1.12 to $43.87 after posting second-quarter earnings of $1.11 a share late Tuesday, well above analysts` estimates.
Investor sentiment
To contrary investors, it may be a major sell signal. But individual investors are strongly upbeat about buying equity mutual funds, according to the latest survey by Fidelity Investments.
The latest results showed a net 39 percent of households with some form of investments intending to buy stock mutual funds over those intending to sell. That`s up from 12 percent in June and near the record of 40 percent in May 1991, after Desert Storm.
Michael Hines, senior vice president at Fidelity, thinks the July number is more than a blip. Despite high unemployment, a record number of Americans are working. The personal saving rate is up in these uncertain times.
Indeed, the overall Fidelity investor sentiment index dropped for the second month, to 78.3 in July from 82 in June. Families surveyed expect their incomes to rise at less than the inflation rate over the next 12 months.
”Saving is fashionable,” especially among aging Baby Boomers, Hines said.
