Investors count on rate cut

NEW YORK —  U.S. stock prices rallied Monday, despite a dismal report on new-home sales and sharp declines overnight in overseas markets, as investors counted on another big interest rate cut by the Federal Reserve this week.

The Dow Jones industrial average finished up 176 points after being down 95 points early in the day.

Overnight, Japan’s Nikkei index slumped 4%, Hong Kong’s major index dropped 4.3% and Shanghai’s market tumbled 7.2%. In Europe, key indexes fell 1.4% in Britain and 0.6% in France but edged up in Germany.

In the U.S., financial stocks led the way as investors wagered that the central bank would cut its benchmark rate by half a percentage point on top of its three-quarters-of-a-point reduction last week. Lower rates, which are intended to boost economic activity, also tend to bolster banks’ profitability.

“Traders are loath to go into Wednesday’s [session] with positions that may be against the Fed,” said A.C. Moore, chief investment strategist at Dunvegan Associates Inc. in Santa Barbara. “The rule is don’t fight the Fed.”

Traders in interest rate futures Monday were pricing a 100% chance of at least a quarter-point cut and an 86% chance of a half-point cut.

But there remained concern that the Fed might cut by only a quarter of a point. That’s because some of last week’s plunges in foreign markets might have been sparked by a French bank’s unwinding of positions taken by an alleged rogue trader, rather than investors’ panicking over the global economy. That could lighten the pressure on the central bank for another sizable cut.

Stocks initially fell Monday after the Commerce Department reported that sales of new homes sank 4.7% in December from the month before on a seasonally adjusted basis. Sales for 2007 plunged a record 26% from 2006. But share prices recovered as investors appeared to conclude that the report increased the likelihood of a big Fed rate cut.

An index of builder stocks sank as much as 4.4% on the new-home sales report but then rallied on rate cut hopes to finish up 5.7% for the day.

The Dow climbed 176.72 points, or 1.5%, to 12,383.89. On Friday, the blue-chip index sank 171 points after a two-day gain of more than 400 points.

The broader Standard & Poor’s 500 index rose 23.36 points, or 1.8%, on Monday to 1,353.97, and the Nasdaq composite index rose 23.71 points, or 1%, to 2,349.91.

The Russell 2,000 index of smaller-company stocks rose 13.79 points, or 2%, to 702.39.

Advancers outnumbered decliners by nearly 3 to 1 on the New York Stock Exchange.

Yields on government bonds rose along with stocks. The 10-year Treasury note climbed to 3.59% from 3.56%. The dollar fell against the yen and the euro, and gold prices gained $16.60 to another record close of $927.10. Crude oil futures rose 28 cents to $90.99 a barrel in New York.

All 10 main industry groups in the S&P; 500 advanced, led by financial firms and phone companies. Financial stocks are up 11% from a four-year low reached Jan. 18.

Bank of America added $1.72 to $41.20, JPMorgan climbed $1.93 to $45.57, Citigroup rose $1.01 to $27.65, Goldman Sachs Group climbed $4.88 to $196.25 and insurer American International Group rose $1.53 to $54.75.

Shares of Countrywide Financial fell 7 cents to $5.95 after the disclosure that Chief Executive Angelo Mozilo agreed to forfeit $37.5 million in compensation.

Among home builders, Centex gained $2.26 to $28.64. Lennar added $1.52 to $18.50. Pulte Homes rose 68 cents to $13.78, putting it up 31% this year.

In other market highlights:

* Alliance Data Systems tumbled $23.12, or 35%, to $42.48 after the credit card services company said its proposed leveraged buyout by private equity giant Blackstone Group might be kaput. Blackstone told the company that it could not get regulatory approval for the deal.

* McDonald’s slumped $3.03, or 5.6%, to $51.07. The fast-food chain’s U.S. sales were flat in December compared with a year earlier.

* SLM, known as Sallie Mae, gained 57 cents to $20.45. The student lender received $31 billion in essential bank financing and ended a court battle over a bid for the company that collapsed last year.

* Corning added 73 cents to $23.10. The biggest maker of glass for flat-panel displays forecast sales and profit that topped analysts’ estimates.

* Sprint Nextel gained 59 cents, or 6.3%, to $9.97 and led an index of phone firm stocks to a 2.6% advance. Barron’s said Sprint shares were “simply too cheap to ignore” after losing almost a third of their value this year. Sprint also might be a buyout target, Barron’s said.

AT&T; rose $1.14 to $36.40. Director August Busch III, former CEO of Anheuser-Busch, bought 63,000 AT&T; shares for $36.10 each on Friday, according to a federal filing.

* YRC Worldwide slumped $2.78 to $16.08. The trucking company’s fourth-quarter results fell short of expectations.

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Times wire services were used in compiling this report.