Dow at New High as Fears Recede

Who’s afraid of the Federal Reserve?

Apparently not Wall Street.

The Dow Jones industrial average rocketed 199.15 points, or 1.8%, to a record high of 11,299.76 on Monday, surpassing the previous peak of 11,209.84 set July 16.

The broad market also was sharply higher, with the Nasdaq composite surging 2.7% and the average New York Stock Exchange stock gaining 1.4%.

Although no other major index joined the Dow at a record, and although trading volume was modest, traders said there was no question that many investors were betting that the expected quarter-point Fed rate increase today will be the central bank’s last move for a while.

“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.�

The Dow lost 5% from its July 16 high to its Aug. 2 low, but the broad market fell much harder, reflecting interest rate worries and other concerns.

The Nasdaq composite slid more than 13% between July 16 and Aug. 10. It is now down about 5% from its July peak.

In the bond market Monday, yields were mixed. The yield on the 30-year Treasury bond eased to 5.98% from 5.99% on Friday, continuing its recent descent after peaking at 6.28% on Aug. 12.

But shorter-term yields, which would be more directly affected by a Fed increase, moved up. The yield on the one-year T-bill climbed to 5.19% from 5.16% on Friday.

Still, shorter-term yields also are below their recent peaks, analysts noted.

The slide in yields “has clearly lifted spirits� on Wall Street, said Hugh Johnson, strategist at First Albany Corp.

Monday’s stock rally occurred on uninspired volume, as many traders were on vacation and many investors stayed on the sidelines. Even so, winners topped losers by 17 to 13 on the NYSE and by 21 to 18 on Nasdaq.

Some analysts said the market was simply getting a jump on the “relief rally� that many experts figured would follow the Fed meeting. “We got the rally done ahead of time,� said Gail Dudack, strategist at Warburg Dillon Read.

“The equity market seems extraordinarily confident it knows what’s happening [with the Fed], which actually makes it a little vulnerable if something unexpected happens,� she added.

Jim Weiss, chief investment officer at State Street Research in Boston, said he doubts the central bank is worried about becoming too predictable from the market’s point of view. What the Fed wants most is for investors to understand that it is committed to take decisive action against inflation, Weiss said.

But even if the Fed does exactly what’s expected today--raise short-term rates by a quarter of a percentage point without issuing any alarming commentary--that doesn’t leave blue skies for equities, Weiss argues.

With stock valuations still high, “there is not a lot of room for error,� he added. Unexpectedly strong August employment statistics or other news events could upset the momentum, he said.

And if the Fed raises its key rate by half a point instead of a quarter, or if it says something troubling in its public commentary, “we could retrace this rally very quickly,� Weiss said.

In other trading, the dollar registered its biggest gain against the euro in three months but was little changed against the yen.

Among Monday’s highlights:

* In the Dow, only two of the index’s 30 stocks closed at new highs: American Express, up $3.50 to $146.38; and 3M, up $2.50 to $98.94.

Because the Dow is a price-weighted index, its swings are affected more by changes in its highest-priced stocks than changes in its lower-priced stocks.

Hence, even though Johnson & Johnson, up $2.38 to $101.31, and GE, up $3.75 to $116.56, did not hit new highs Monday, the fact that they are among the Dow’s highest-priced components helped push the index to a record.

* Internet stocks and major tech shares were hot, led by such names as Yahoo, up $7.13 to $152.13; America Online, up $3.81 to $99; Intel, up $3 to a record $82.94; and Dell, up $2.50 to $45.75.

* Drug stocks were strong as investors searched for stocks still well below their 1999 highs. Merck gained $2.44 to $70.06, though it still is 20% below its peak of $87.38 reached March 22.

Pfizer added $1.69 to $38.63, Bristol Myers Squibb surged $2.31 to $73 and Eli Lilly rocketed $3.44 to $71.

Many biotech shares also rallied. Amgen jumped $3.63 to $83.69 and Biogen leaped $5.50 to $80.75.

* Bank stocks surged. Citigroup jumped $2.25 to $48.56, Wachovia gained $2.06 to $83.50 and J.P. Morgan jumped $6.81 to $139.75.

* Merger activity enlivened trading. United Water Resources rose $2.44 to $33.50 after French utility Suez Lyonnaise des Eaux launched a $35-per-share bid to acquire the company.

Market Roundup, C12