Stocks closed broadly higher in heavy trading Thursday, led by a rally in technology stocks.
The beleaguered Nasdaq composite index scored its first three-day advance since before Labor Day. After a disturbing dip, the technology-heavy index has surpassed the level reached in the one-day rally Jan. 3, when the Federal Reserve cut its short-term interest rate target.
Investors seemed to be looking past current corporate performance warnings, including a disappointing sales forecast by Internet portal Yahoo! late Wednesday.
Instead, investors appear to be buying on hopes for lower interest rates and expectations that market pessimism has reached its peak.
Once again, however, disappointing sales forecasts by prominent tech companies late in the day–this time by Hewlett-Packard and Gateway–promised to test the power of the nascent rally.
Both stocks dropped in after-hours trading Thursday and could place pressure on the overall market Friday ahead of a three-day weekend for Monday’s Martin Luther King Jr. Day holiday.
In Thursday’s regular session, the Dow Jones industrial average gained 5.28 points, to 10,609.55, on New York Stock Exchange volume of 1.36 billion shares. Winning stocks outnumbered losers by a 4-3 ratio among NYSE-listed stocks.
The Standard & Poor’s 500 index added 13.55, or 1.0 percent, to 1326.82.
Gains by big-name computer-technology stocks pushed the Nasdaq composite index up 116.39 points, or 4.6 percent, to 2640.57, in heavy Nasdaq trading of 2.76 billion shares. Winners topped losers by more than 2-1.
Treasury securities declined in the face of the Nasdaq rally.
Two out of three: Two of three elements needed for a January stock market rally seem to be in place.
But watch out for that last step. It’s a big one.
First, share prices compared with company earnings have become more reasonable, although “it doesn’t mean a cheap market can’t get cheaper,” said Joseph Keating, chief investment officer for Lyon Street Asset Management, adviser to the Kent family of mutual funds.
Second, last week’s unscheduled half-point cut in short-term interest rates by the Fed prompted hopes of more cuts coming by the end of the month. Lower interest rates will make stock prices seem even more reasonable and cut the returns on money now piling up in money funds and cash reserves at equity mutual funds.
The third issue is investor sentiment, which turned remarkably sour after Election Day in November, Keating said.
The calamitous presidential vote count, headlines about major job cuts and miserable winter weather conspired to keep investors as well as consumers in a foul mood.
“You listen to some folks and they make it sound like investors aren’t pessimistic enough,” Keating said.
One of those folks is Jeffrey Diermeier, chief investment officer at Chicago-based Brinson Partners, a unit of UBS Asset Management.
Diermeier said investor expectations of returns on equities are still too optimistic to represent the “capitulation” that a market correction requires to reach bottom and turn higher.
Friday’s report on retail sales in December will have a curious effect on investor sentiment. Economists surveyed by financial news wire services expected, on average, that retail sales declined by 0.4 percent from November.
But a hard core of forecasters predicted much worse results.
The numbers “have the potential to be market-shockingly weak,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y., who sees a 1.0 percent drop.
A surprisingly weak retail sales report likely could prompt the Fed to cut short-term rates quickly by another half point, to 5.50 percent–a move the stock market favors. But it’s not clear how bad news about retail sales will boost consumer and investor confidence or corporate profit outlooks.
Local news: Shares of catalog retailer Lands’ End gained 5.6 percent, despite a warning by the Dodgeville, Wis.-based merchant that sales and profits for its fiscal year 2001, ending this month, will be well below year-ago levels. Analysts surveyed by First Call/Thomson Financial expect the company to earn $1.33 a share, versus $1.56 in fiscal 2000.
