Falling Interest Rates Push Dow to a New High : Market Overview

* A late rally, fueled by computerized buy programs and declining interest rates, lifted the Dow Jones industrials to another high. The blue chip index jumped 27.99 points to 3,398.43, just eclipsing the record 3,397.99 reached May 19.

* Bond yields fell as a government report on the nation’s money supply offered new evidence of a weak recovery.

Stocks

Traders said an afternoon rally in bonds touched off futures-linked stock buying. When the Dow broke through 3,380, speculators rushed in, giving prices a final push.

In the broader market, advancing issues outnumbered losers nearly 3 to 2 on the New York Stock Exchange. Still, no other major stock index followed the Dow to a new high.

Big Board volume came to 195.30 million shares, against 182.24 million Wednesday.

Ironically, some analysts said the Dow’s sudden gain was a function of the market’s weak internal dynamics. “When there is a lack of conviction and liquidity, you tend to get these spikes,” said Tom Luker, trader at Nikko Securities.

The drop in bond yields that helped drive stocks followed news of a plunge in the nation’s money supply, a sign of a still-weak economy. However, the government said Thursday that initial claims for unemployment insurance dropped 4,000 in the week ended May 16.

While the signals remain mixed, most investors appear to be betting that the economy will continue to recover, which should help stocks.

Among the market highlights:

* Drug and food issues returned to favor in a big way, as investors hunted for growth stocks that had been beaten down recently. Philip Morris led food stocks, climbing 1 5/8 to 77 on word of a new $3-billion stock buyback plan.

Other food winners included Kellogg, which soared 3 3/8 to 59 3/8 after raising cereal prices 3.5%; General Mills, up 3 1/8 to 62 1/4; Quaker Oats, up 1 3/8 to 56 3/8, and Sara Lee, up 1 5/8 to 49 5/8.

* In the drug group, Pfizer zoomed 3 1/8 to 74 7/8, Lilly was up 1 7/8 to 67 3/8, Johnson & Johnson gained 2 7/8 to 97 1/4, Alza surged 1 3/4 to 45 1/2, and Amgen rose 2 1/8 to 61.

* Industrial stocks were lackluster outside the Dow index, with some exceptions: Monsanto surged 1 5/8 to 64 1/4, Dow Chemical was up 1 3/4 to 62, Snap-On Tools gained 1 3/8 to 34 1/2, and farm machine giant Varity rose 1 1/8 to 16 1/8.

Among smaller industrial issues, the Laguna Niguel-based plastics firm Furon surged 1 3/4 to 12 3/4 on news of a profit turnaround.

* The big losers were airline stocks, plunging as another round of fare wars hit. AMR, parent of American Air, tumbled 2 to 61 5/8; UAL, United’s parent, gave up 4 to 113 3/4, and USAir fell 3/4 to 12 1/8.

* Phone stocks also were broadly lower after the merger terms of Centel and Sprint proved disappointing. Centel crashed 10 1/2 to 32, while Sprint fell 1 3/8 to 23 1/8.

* Del Mar-based diet chain Jenny Craig plummeted 3 1/4 to 16 7/8 after the firm said late Wednesday that the current quarter’s earnings will fall short of year-ago results.

In overseas markets, Tokyo stocks closed firmer. The Nikkei average ended 108.69 points higher at 17,931.25. London stocks ended slightly lower, the Financial Times 100-share average finishing off 4.4 points at 2,694.2. Frankfurt’s market was closed for Ascension Day.

Credit

The Treasury’s 30-year bond rose 1/2 point, or $5 per $1,000. That pushed its yield down to 7.86% from 7.90% Wednesday.

Trading was quiet until late in the day, when the government said the measure of the money supply known as M2 tumbled by $7.4 billion in the week ended May 18.

Economists said that indicated that the money supply was growing more slowly than desired by the Federal Reserve, reflecting uninspired economic growth.

The latest drop could mean that banks aren’t lending money, or that there simply isn’t demand for loans. If it does translate into a slower economy, it raises the chance of another interest-rate cut by the Federal Reserve--which would be a positive for bonds.

The federal funds rate, the interest on overnight loans between banks, was 3.81%, down from 3.88% Wednesday.

Currency

The dollar ended lower against most major currencies, in part because much of Europe was closed for the Ascension Day holiday.

In New York, the dollar closed at 129.50 Japanese yen, down from 130.20 Wednesday. It fell to 1.627 German marks from Wednesday’s 1.638.

Commodities

Oil futures were little changed for a second straight day, as energy prices held on to Tuesday’s big gains but couldn’t extend them.

On the New York Merc, light, sweet crude oil for July delivery rose 3 cents to $21.95 a barrel.

Gold led precious metals lower, with the June contract on New York’s Comex falling $1.20 to $337 an ounce. July silver dropped 3 cents to $4.07.