Indexes Set Highs as Smaller Stocks Sprint Into a Rally

Stock indexes hit all-time records Friday, with more smaller stocks setting new highs after months of lagging the blue chips.

The Nasdaq market reached its first new high since January, as investors grew confident that Federal Reserve Board policy has swung away from raising interest rates. Similarly, the Russell 2,000 list of smaller companies had returned to record levels only on Thursday.

The Dow Jones industrial average rose 87.78 points to 7,345.91, beating the previous Thursday’s record close at 7,333.55 and gaining 151.24 for the week. The Standard & Poor’s 500 and other major indexes also jumped to new highs, with the Wilshire 5,000 index, which covers virtually all public companies, breaking 8,000 for the first time.

Some traders, however, noted that stocks have historically rallied into three-day weekends, often only to unwind the gains the following session.

“It’s a superb time to be in smaller stocks. They are so dirt cheap it’s unbelievable,” said Jim O’Shaughnessy, who runs his own investment and research firm. At the same time, “big-cap growth names like Gillette and Microsoft have never been as highly valued.”

The Nasdaq’s inability to keep up with the Dow’s ascent into record ground had been seen by market analysts as a potential Achilles’ heel for Wall Street.

But high-technology and smaller-name stocks began closing the gap on blue chips over the last three weeks. And with many traders exiting early Friday ahead of the holiday, the bulls easily carried the day.

The rally worried some money managers, such as Phil Orlando, chief investment officer at Value Line Asset Management, who said he expects stocks to weaken in the next month and a half as economic reports show continued strength in the economy and concern grows that the Fed will raise benchmark overnight bank lending rates in July.

“I’m astounded by today’s rally,” Orlando said. “There’s no economic news. The bond market’s flat, and stocks are straight up.”

Orlando said stocks now fully account for the expected growth this year.

“With the Dow at 7,350, there’s more risk to the downside than to the upside,” he said.

Interest rates slipped slightly in the bond market after creeping up during the previous two sessions. The 30-year Treasury bond slipped from 6.9% to 6.8%.

“The most important piece of news this week was not the Fed’s decision to leave rates unchanged, but when they released the minutes, which said they removed their bias toward tightening credit right after they tightened,” said Jeffrey Applegate, chief investment strategist at Lehman Bros. “It makes it seem a good deal less likely that you’ll see a series of Fed tightenings.”

The day’s gains were spread across most sectors. Among the Dow 30, for example, there were few standouts among the advancers, and the only decliner was Boeing, which fell just 1/8 to 100 1/4.

Among market highlights:

* Westinghouse Electric’s CBS unit confirmed that Peter Lund, president of its CBS television and cable group, had resigned. Westinghouse’s shares rose 1 3/4 to 18 3/4.

* Medtronic rose 5 to 71 7/8 after the medical-device company late Thursday reported upbeat quarterly results. J.P. Morgan Securities raised its fiscal 1998 and 1999 earnings estimates on Medtronic, citing the strong earnings.

* Stocks of computer disk drive companies extended their decline after two brokerages cut their earnings estimates on Seagate Technology and on investor fears that disk drive prices will decline further, traders said. Seagate fell 2 1/8 to 40 1/4, Read-Rite dropped 2 1/8 to 19 7/8, Western Digital lost 4 1/4 to 52 7/8, and Quantum gave back 3/8 to 38.

Market Roundup, D4