Dow Passes 3,400 Barrier on New Optimism : Economy: The purchasing managers’ monthly report showed more business activity than had been expected, lifting the blue-chip index 16.33 points.

Stocks glided over another milestone Monday, as revived optimism about the economy pushed the Dow Jones industrial average to close past the 3,400 mark for the first time.

The Dow rose 16.33 points to a record 3,413.21, topping the previous record 3,398.43 reached last Thursday.

The catalyst was a bullish report from the National Assn. of Purchasing Management. The group’s members, who make purchasing decisions for major U.S. corporations, reported a big jump in business activity in May, surpassing most analysts’ expectations.

The data was viewed as more convincing evidence that the nation has begun a sustained recovery from recession.

On the New York Stock Exchange, 957 stocks rose while 765 fell, and volume was strong for a Monday, at 190.6 million shares.

More surprising was that stocks showed such resilience in the face of another rise in interest rates: Treasury bond yields jumped as investors figured the strengthening economy may mean that the Federal Reserve will be forced to tighten credit sooner than later.

The Dow had reacted badly to the rate rise in the morning, losing 20 points early on. But as the market neared the close, buyers took control, especially in the case of industrial companies whose earnings should get a significant lift in a better economy.

Auto stocks, for example, helped power the rally. General Motors climbed 2 1/8 to 41 1/2, Ford rose 2 to 46 3/8 and Chrysler soared 1 5/8 to 19 3/4. Merrill Lynch analyst Harvey Heinbach reaffirmed buy recommendations on the stocks.

Also, an auto-industry magazine reported that U.S. auto makers intend to boost production 18% in the third quarter compared to a year ago, to meet expected demand.

The Dow’s crossing of the 3,400 mark was viewed with relief by many analysts. The index has repeatedly tried to top that milestone since early in May, but on each run sellers emerged late in the day to quash the attempt.

Traders said stocks’ ability to rise in the face of higher interest rates is another sign that investors are focusing more on improving corporate earnings than on rates. That kind of shift in focus typically occurs as a bull market wears on, analysts note, and can denote the start of a new upleg in the rally.

Among the market highlights:

* The gains were broad-based, though most major market indexes still closed below their peaks set earlier this year. The Standard & Poor’s 500 index added 1.95 points to 417.30, and the NASDAQ composite index of smaller stocks gained 3.06 points to 588.37.

* Besides GM, the Dow index stocks showing the biggest moves included Alcoa, up 1 1/8 to 78 3/4; Caterpillar, up 7/8 to 61 1/4; Merck, up 1 to 51 3/8, and Procter & Gamble, up 1 1/2 to 104 1/4.

* Other industrial names leading the market were copper producer Phelps Dodge, up 1 5/8 to 91 1/4; Reynolds Metals, up 1 5/8 to 62 3/8; ITT, up 3/4 to 64; truck maker PACCAR, up 2 1/4 to 62 1/2, and Owens-Corning, up 7/8 to 34 3/8.

* Waste-disposal stocks came to life. Chemical Waste Management shot up 1 5/8 to 20, and Waste Management, which owns 76% of Chemical Waste, leaped 2 1/4 to 38.

The Supreme Court ruled in favor of Chemical in a case challenging a fee imposed by Alabama on hazardous waste brought into the state for disposal.

At stake in the case, noted the Value Line Investment Survey, has been “restoration of earnings power at Chemical Waste’s largest hazardous landfill (in Alabama), where disposal volumes fell 50% after the tax was imposed.”

Other waste-disposal firms rising included Browning-Ferris, up 1 5/8 to 22 3/8; Rollins Environmental, up 3/4 to 11 3/4; and American Ecology, up 2 to 19 3/4.

* CBS rocketed 12 5/8 to a 52-week high of 204 5/8 on word of its plans to start charging its affiliated stations fees for carrying network programs. Cap Cities/ABC rose 12 7/8 to 477 3/8 on the news.

* Drug stocks continued to rise from their recent lows. Bristol-Myers was up 1 3/8 to 73 3/4, Schering-Plough added 1 1/4 to 53 1/4, Lilly rose 1 to 67 and Alza gained 1 1/2 to 48.

* Other classic growth stocks that saw renewed buying included Microsoft, up 3 1/4 to 124 1/4; computer networker Novell, up 2 1/4 to 56; toy maker Mattel, up 2 1/4 to 36 5/8, and slot machine maker International Game Tech, up 1 1/2 to 29.

But Gillette sank 1 3/8 to 48 1/4 after its German unit, Braun, said first-half profits fell sharply. It didn’t elaborate.

* Magnetek, an L.A.-based producer of electric machinery, rose 1 to 15 1/4 on word that it will help market the new “E-Lamp” long-life light bulb.

* McDonnell-Douglas dropped 1 1/4 to a new 52-week low of 41 1/4 on word that its planned tie-up with Taiwan Aerospace is in danger of collapsing.

In overseas trading, Tokyo’s Nikkei average closed down 343.64 points or 1.9% at 18,004.11.

In Frankfurt, the DAX average dropped 5.08 points to 1,798.14. London’s Financial Times 100-share ended the day down 10 points at 2,697.6.

In Mexico City, however, the Bolsa index soared 15.03 points to a new record 1,907.36 on word that the Mexican government has continued to pare its huge debt load.

Credit

Interest rates rose across the board following release of the purchasing managers’ report.

The price of the Treasury’s 30-year bond fell 19/32 point, or $5.94 per $1,000. Its yield advanced to 7.88% from 7.83% Friday.

The purchasing report’s optimistic tone makes it less likely that the Federal Reserve will lower interest rates further, many bond traders concluded.

Still, analysts noted that bonds recovered somewhat at midday Monday after separate government reports showed Americans’ incomes and spending rose only slightly in April.

A third government report showed construction spending fell 0.3% in April, the first setback after three monthly gains.

“The data showed these areas might not prove to be as supportive for economic growth over the next three months as they were over the last three months,” said Kevin Flanagan, analyst at Dean Witter Reynolds.

Nonetheless, with the purchasing managers’ report, “speculation of an imminent Fed easing has gone by the board,” he said.

Traders’ attention is now focused on the Labor Department’s employment report on non-farm payroll jobs in May, to be released Friday, Flanagan said.

The federal funds rate, the interest on overnight loans between banks, was quoted at 3.94%, up from 3.69% Friday.

Meanwhile, First Boston Corp. reported that its corporate junk-bond index gained 1.4% in May, adding to the heady returns recorded by junk issues earlier in the year. For the year-to-date, the junk index return is 9.8%, far outpacing the stock market’s minuscule gains.

Currency

The dollar settled mixed on world currency markets, losing ground in domestic trading despite the purchasing managers’ bullish report on the U.S. economy.

Unconfirmed reports that the Bank of Japan had again entered the market to sell dollars and buy yen--in a move to support the Japanese currency--pulled the dollar from its highs.

In New York, the dollar dropped to 126.95 yen from 127.60 on Friday. It also eased to 1.605 German marks from 1.608 Friday.

Commodities

Corn and soybean futures prices rose sharply at the Chicago Board of Trade, then retreated on the prediction of more rain toward the end of the week.

Soybeans gained as much as 23 cents a bushel to an eight-month high before the July contract lost most of the advance and settled 6 1/2 cents higher at $6.22.

Elsewhere, light, sweet crude oil for July settled 8 cents lower at $22.03 a barrel on the New York Mercantile Exchange.

Precious metals futures advanced on the Comex. Gold for delivery in June gained $1.40 to $337.80 an ounce; June silver rose 2.5 cents to $4.04.

Market Roundup, D10