FINANCIAL MARKETS : Bond Rally Pushes Dow to New High

Blue-chip stocks soared to record highs Thursday as fresh evidence of a slowing economy drove bond yields to 21-month lows.

With more investors betting that the Federal Reserve Board is certain to cut short-term interest rates again, the Dow Jones industrials shot up 41.91 points to 4,808.59, topping the old record of 4,802.45 set on Oct. 19.

The broad market also rallied, with rising stocks outnumbering losers by 2 to 1 on the New York Stock Exchange. The Nasdaq composite index leaped 16.82 points to 1,057.32, nearing its record of 1,067.40.

“Interest rates are heading lower--there’s not a question about it,” said Alan Bond, chief investment officer at Bond Procope Capital Management in New York.

Major retailers reported Thursday that October sales were bleak. In addition, the National Assn. of Purchasing Management said its index of manufacturing activity fell to 46.8 in October from 48.3 in September, the third consecutive monthly decline. A reading below 50 indicates manufacturing is contracting.

Those reports boosted expectations that the Fed will be forced to cut short-term rates before year’s end, to prop up the economy.

Additional important data is due today, when the government reports on October unemployment.

The bond market reinforced expectations for lower rates Thursday as buyers swarmed, driving the yield on the benchmark 30-year Treasury bond to 6.24% from 6.29% Wednesday. The last time the yield was lower was Jan. 31, 1994, when it stood at 6.23%.

Shorter-term yields also slumped Thursday. The one-year T-bill yield dipped to 5.40% from 5.45%.

Wall Street’s optimism about lower rates is overpowering recent concerns that the evidently weak economy will be a drag on corporate profits. Analysts note that interest rates often are the most important determinant of stock prices, because lower rates make bonds and bank savings accounts less compelling alternatives.

Recent bullishness also stems from widespread expectations that Republicans will win out in the budget battle with the White House, guaranteeing a balanced-budget plan, analysts say.

While some market veterans are concerned that stock and bond values already reflect the good news to come in the near-term, others say there is nothing to do but enjoy the ride for now.

Eugene Peroni, chief technical analyst at Janney, Montgomery Scott, noted that transportation stocks led Thursday’s rally, a sign that investors continue to bet on a stretched-out economic expansion.

“The fact that the transports and industrials are so strong shows investors are looking ahead now [past U.S. budget squabbling] and seeing corporate earnings on a growth, not a peaking, course,” Peroni said.

Among Thursday’s highlights:

* The Dow industrial index was powered higher by Allied Signal, up 1 7/8 to 43 3/4; IBM, up 2 3/4 to 99 5/8; GM, up 7/8 to 44 1/4; Boeing, up 1 3/8 to 69 3/8, and GE, up 1 1/4 to 63 1/2.

* The Dow transportation index shot up 60.56 points, or 3.2%, to 1,985.44, nearing its record high of 2,000.39. Gainers included United Air Lines parent UAL, up 7 3/8 to 184 3/4; Federal Express, up 4 1/8 to 86, and railroad giant CSX, up 3 5/8 to 85 3/4.

* Retail stocks soared despite the bleak October sales reports from many retailers. “The sales were disappointing but the stocks have already discounted the worst-case scenario including what we expect to be probably the worst Christmas in a decade,” argued Phil Orlando, a senior vice president at First Capital Advisers.

Buyers snapped up Sears, which rose 1 1/4 to 36 1/8; Dayton Hudson, up 5 1/4 to 73 7/8; May Department Stores, up 1 3/8 to 41, and Gap, up 3 3/4 to 42 1/4.

* In the technology area, Internet-related software stocks again led the charge on earnings optimism. Spyglass surged 13 3/4 to 70 1/2, Netscape zoomed 9 1/4 to 98 1/4, Netcom jumped 5 1/8 to 68 5/8 and Quarterdeck leaped 4 1/8 to 24 7/8.

Other tech gainers included Intel, up 2 1/16 to 72 7/8; Adobe Systems, up 3 5/8 to 60 3/4; Sun Microsystems, up 2 1/2 to 78 7/8, and Parametric, up 2 to 68 1/2.

* Many financial stocks gained with falling rates. NationsBank surged 1 5/8 to 68 1/2, Chemical Banking rose 2 to 60 3/8 and Wells Fargo rose 4 1/8 to 215 7/8.

Stocks and bonds were helped by a stronger dollar, which rose to a six-week high against the Japanese yen, closing at 104.02 in New York from 103.25 Wednesday.

In foreign markets Tokyo’s Nikkei stock average ended up 554.31 points at 18,028.80 as the dollar gained at the yen’s expense.