Stock prices advanced broadly Tuesday, as investors seemed to look past a likely increase in the government’s official short-term interest rate target and new signs of commodity price inflation.
The Federal Reserve’s monetary policy committee is widely expected to boost its overnight rate target–the so-called fed funds rate–to 5.75 percent from 5.50 percent Wednesday.
But the market seems to have accepted the prospect of a fourth quarter-point interest-rate increase since last summer.
Short-term interest rates have been heading higher for weeks. Tuesday’s auction of one-year Treasury bills, for example, brought a rate of 5.90 percent, the highest rate at a one-year bill auction since March 30, 1995.
But in Tuesday’s trading, worrisome economic news lost out to upbeat corporate news, including word that that wireless communications developer Qualcomm signed an intellectual property deal with China.
Qualcomm stock gained $9.06, to $136.06, in Nasdaq trading, helping push the Nasdaq composite index up 111.63 points, or 2.8 percent, to 4051.98.
The Dow Jones industrial average advanced 100.52, to 11,041.05, in a broad rally lead by retailers Wal-Mart Stores and Home Depot, software giant Microsoft, automaker General Motors and financial-services leader American Express.
Advancing issues led decliners by about a 3-2 margin on the NYSE and Nasdaq stock market.
Retailing stocks rose ahead of what analysts say will be strong fourth-quarter results.
General Motors advanced on the company’s plans to allow shareholders to exchange up to $8 billion of their stock for shares in sister company Hughes Electronics.
Investors bid up Microsoft on word of the company’s joint venture with data-storage provider EMC.
Such hot corporate developments tended to offset a troubling inflation outlook compiled from recent economic reports.
After last week’s strong employment cost and price inflation reports, “our view on the probability” of the fed funds rate rising on Wednesday “went from 100 to 150 percent,” said Chris Wolfe, chief equities strategist for J.P. Morgan’s private investment group.
Wolfe believes the Fed will push up its interest rate target by a full point, to 6.5 percent, by midyear, but he said the stock market at the moment is comfortable with gradual increases in interest rates designed to preempt inflation.
But if the Fed on Wednesday announces a sharp rate increase–a half of 1 percent or three-quarters of 1 percent–“you’re going to shock the system. You’ll have investors second-guessing, what is [Greenspan] seeing that we’re not seeing? That’s one of the risks in the meeting.”
Wild and crazy: The outlook for inflation and interest rates plus headline-grabbing corporate news influences stock prices day to day. But the market itself was a major part of the story in the first month of the year.
The New York Stock Exchange and Nasdaq stock market both reported record-high average daily share volume of more than 1 billion shares for the month. Average daily share volume of the Nasdaq market was 1.76 billion shares; the NYSE average was 1.1 billion.
All else being equal, share volume will be higher in a dealer market, such as the Nasdaq market, than an auction market, such as the NYSE. But in either case, persistent billion-share days reflect a market churning aimlessly.
Last month’s extraordinary intraday ranges on major stock indexes also reflected market volatility. The nine biggest intraday point ranges were posted last month by the Nasdaq composite index, topped by a 208-point range on Jan. 24, said Fane Lozman, chairman of Chicago-based ScanShift, a market monitoring service.
The Dow Jones index of Internet stocks gained as much as 8 percent one day and fell nearly 10 percent a few days later.
“The risk here is that volatility can take you out of positions much quicker if you have trading limits in the short term,” said J.P. Morgan’s Wolfe. “But for long-term investors, volatility really shouldn’t be an issue.”
Indeed, the stock price volatility index measured at the Chicago Board Options Exchange was relatively stable last year, after a dramatic upward spike in the fall of 1998. The index, based on prices of put and call options for the Standard & Poor’s 100 index, has been declining in recent days.
