Stocks, Mocking Rate Hike Fears, Stage Rally

What Fed rate hike?

Wall Street staged a strong rally amid a sharp jump in trading volume on Tuesday, as some investors thumbed their noses at the Federal Reserve’s expected interest rate increase today.

The Dow industrials surged 160.20 points, or 1.5%, to 10,815.35, closing at the high for the day.

The Nasdaq composite gained 1.5% and the Russell 2,000 small-stock index rose 1.2%.

“Some buyers are back, ready to be adventurous,� said Larry Wachtel, market analyst for Prudential Securities.

Investors expect that “the Fed’s going to raise rates once and everything’s OK,� said Arthur Micheletti, investment strategist at Bailard, Biehl & Kaiser, which manages $1.3 billion in Foster City, Calif.

The Fed is expected to raise its benchmark short-term interest rate to 5% today from 4.75%, to slow the economy.

Long-term bond yields continued to pull back on Tuesday from recent 19-month highs, as bond investors too indicated by their actions that they don’t expect the Fed to embark on a major rate-increase cycle.

The yield on the bellwether 30-year Treasury bond dipped to 6.06% from 6.09% on Monday. Yields have fallen for three straight sessions.

Some analysts were cautious, waiting to see what the Fed signals in the language of its announcement. “The main concern will be whether the [Fed] retains a tightening bias,� said Scott J. Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. That would indicate that the Fed is inclined to implement further rate increases.

But in the stock market on Tuesday, buyers seemed to be looking beyond near-term interest rate concerns to the mounting economic recovery in Asia and what that might mean for U.S. firms’ sales.

In a sign that Asia’s biggest economy is pulling out of its nine-year slump, the Japanese government said household spending rose at its fastest pace in almost three years and that the unemployment rate fell for the first time in almost a year.

South Korea said its industrial production surged 22% in May from a year earlier, for its biggest gain in 11 years.

Asian stock markets, the world’s biggest gainers this year, were mixed on Tuesday. Tokyo’s Nikkei-225 index rose 1% to 17,782, but South Korean shares slipped.

Year-to-date the Nikkei index is up 28.5%, and South Korea’s main index is up 60%.

With today the final trading day of the second quarter, the U.S. Dow index is up 17.8% year-to-date, the Nasdaq composite is up 20.5% and the Standard & Poor’s 500 is up 10%. The Russell 2,000 is up 7.6%.

Among Tuesday’s highlights:

* Tech stocks led the market higher, partly on optimism about rising Asian sales. Winners included Applied Materials, up $2.75 to $69.13; Intel, up $2.25 to $59.25; Apple, up $2.81 to $45.38; Cymer, up $1.44 to $24.75; IBM, up $2.06 to $124.63; and QLogic, up $8.50 to $134.13.

* In the Internet sector, America Online rose $2.19 to $106, and Doubleclick gained $6.06 to $85.19.

Online brokerage stocks also continued to rebound, led by Charles Schwab, up $5.31 to $100.13, and Ameritrade, up $8.94 to $92.44.

* Drug stocks, which have tumbled in recent months, shot higher as President Clinton offered details of his Medicare prescription benefit plan. Drug firms initially worried it would set the stage for price controls, but analysts said the plan has little chance of passing. Pfizer surged $3.81 to $104.88, and Warner-Lambert gained $4.38 to $67.13.

* Major energy stocks rallied. Chevron surged $4.19 to $93.69 after brokerage Donaldson Lufkin & Jenrette raised its rating on the stock. Exxon added $1.94 to $77, and Transocean Offshore was up $1.75 to $26.69.

Market Roundup, C9