Expected Drop in Interest Rates Helps Dow Climb 34

Shaking off three straight days of losses, the stock market bounced back Tuesday on expectations that interest rates will fall further.

The Dow Jones industrial average, which last week suffered its worst bruising ever, soared 34.25 points Tuesday to close at 1,769.76. Last week, the Dow lost 82.5 points, followed by a 3.71-point slippage on Monday.

Stock prices reacted to a surge in the bond market caused by the widespread belief that the Federal Reserve Board is about to cut the discount rate, analysts said.

Falling oil prices and a declining dollar also contributed to the rebound in the stock and bond markets. But analysts cautioned that last week’s slowdown in the stock market’s wild ride can be expected to return.

“At this juncture the market is subject to some very wild gyrations,� said Eugene E. Peroni Jr., director of technical research with the Bateman Eichler, Hill Richards brokerage firm in Los Angeles. “It’s very easy to go from a nosebleed to a nose-dive and back again.�

Gaining issues outnumbered losers by about four to one on the New York Stock Exchange. Trading volume on the Big Board reached 146.29 million shares, compared to 129.76 million shares Monday.

Other major indicators followed the lead of the Dow average of 30 industrials, which recorded its 10th-largest one-day gain in history.

The New York Stock Exchange composite index was up 2.66 points to close at 134.73. The American Stock Exchange market-value index gained 3.53 points to close at 267.50. Standard & Poor’s 500 index closed at 233.58, up 4.89.

Plummeting oil prices and interest rates have fueled the market rally that began last September, propelling the Dow more than 500 points to a record high of 1,821.72 two weeks ago.

Traders were spurred Tuesday by falling oil futures prices, which gave back the gains that they posted Monday. Contracts for May delivery of West Texas Intermediate, the benchmark U.S. crude oil, fell $1.86 to $12.47 a barrel.

Analysts said Tuesday’s recovery drew much of its strength from hope that the Fed is about to cut the discount rate, which was last trimmed in early March to 7%, a decline of half a percentage point. In addition, Southwest Bank of St. Louis lowered its prime rate to 8 3/4% from 9% on Tuesday, but no major banks followed.

“The thing that will keep the market afloat is the continuing belief that the discount rate will be cut,� said Monte Gordon, market analyst for Dreyfus Corp., a mutual fund firm.

But the market also faces continuing uncertainty because the economy has remained sluggish and first-quarter corporate earnings may not keep pace with stock prices, analysts said.

Ripe for a Rebound

After last week’s sharp declines, the market was ripe for a rebound, analyst Michael Metz of the Oppenheimer & Co. brokerage said. “But I think the correction that began last week is not over,� he added. “The problem here is how many times are we going to reward a drop in interest rates? I think we need tangible evidence that the economy is improving, and I don’t think we’ve seen that yet.�

The stock market is doing “the dance of the correction,� Gordon said. “It takes awhile. It doesn’t happen in one day.�

Peroni said the market is regrouping and will be characterized by volatile price swings before it settles down. “I think the underlying tone of the market is still very strong,� he said.

One of the big winners of the day was National Gypsum, which closed at 55, up 5 1/2. After the market closed, Wickes Cos. said it would launch a tender offer to compete with the leveraged buy-out proposed by a group led by National Gypsum management.

Genstar of Canada was the most actively traded issue, slipping 1 7/8 to 38 3/4 on news that its proposed $1.7-billion purchase by Imasco Ltd., another Canadian company, is being opposed by some Canadian legislators.

Bond Prices Surge

Another heavily traded issued was International Business Machines, which is scheduled to release its first-quarter financial results Friday. IBM gained 2 1/2 to close at 152.

Disney climbed 2 to 38.

In the credit markets, government bond prices surged. Corporate and municipal issues also gained.

The explosive rally came as dealers were encouraged by the level of the federal funds rate, which is the interest charged on funds that banks lend one another overnight to meet reserve requirements. The federal funds rate traded at 7%, the same as late Monday and down from last week’s average.

Interest rates on three-month Treasury bills fell 10 basis points to 6.13%. Six-month bills slid 10 basis points to 6.12%, while one-year bills also dropped 10 basis points to 6.08%.

The price of the bellwether 30-year Treasury bond gained nearly 3 points, or $30 for each $1,000 in face amount.