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Markets soar on inflation news

A trader catches some needed rest at the end of trading at the New YorkStock Exchange Tuesday, where the Dow jumped 174.78 points.

AP photo

The Washington Post

Good news on inflation and industrial production propelled the stockand bond markets higher Tuesday. Big company stocks such as Coca-Cola, Gilletteand Procter & Gamble, which have been in a slump since early August,rallied the most as investors banished for the day fears that acceleratinginflation would lead to higher interest rates and weaker corporate earnings.

Bonds had their biggest day in three years as the yield on the 30-yearTreasury bond fell to 6.40 percent, from 6.57 percent on Monday, after thegovernment announced that consumer prices rose only 0.2 percent last month.The long bond had closed at 6.57 percent Monday.

Stocks soared in response not only to the inflation numbers, but alsoto a separate government report that industrial production rose 0.7 percentin August, which suggests that economic growth remains on track.

The Dow Jones industrial average soared 174.78 points, or 2.26 percent,to close at 7895.92, and the Standard and Poor's 500-stock index rose 25.87points, or 2.81 percent, to 945.64.

Small company stocks, the recent darlings of the market, gained as well.The Nasdaq composite average climbed 33.68 points, or 2.06 percent, to reacha record closing high of 1668.60.

As far as the stock market is concerned, all the news was good,said Peter J. Canelo, U.S. investment strategist at Morgan Stanley DeanWitter. Low inflation. Nothing to suggest the Federal Reserve willraise short-term interest rates. And good economic growth.

Richard T. McCabe, chief market analyst at Merrill Lynch, said, Thismeans the August-September phase of the correction in large-capitalizationconsumer companies is over. The bull market resumes.

NatWest Securities market analyst Thomas McManus noted that the so-calledNifty Fifty stocks, consumer-oriented companies with an average market valueof $55 billion, rose — percent Tuesday.

This was a melt-up, almost volcanic, said investor Carl E.Hathaway of Hathaway Associates Ltd. in Rowayton, Conn. But that hasbeen a part of this bull market recently. Days like this are not worrisomeunless the exuberance gets completely out of hand.

Hathaway likened the current stock market to a self-sealing tirethat can get punctured but never goes completely flat because not all ofthe sectors of the market go flat at the same time.

He noted that during the recent swoon in big-capitalization stocks, smallones did well. When small-cap stocks were depressed in recent years, thebig companies led the market higher.

Right now the big stocks are trying to catch up. Coca-Cola, which reacheda high of $72.62 earlier this year, rose $1.68 Tuesday to close at $59.25.

Despite the rise in many Dow stocks, the index remains about 4 percentbelow its July high. In contrast, the Nasdaq began reaching record highslast week.

One reason might be that investors have more confidence in the profitgrowth of small companies than big corporations. Small companies have lessexposure to slumps in overseas economies and a strong dollar, which makesU.S. exports less competitive.

Cliff Waldman, an economist at the National Federation of IndependentBusiness, which represents 600,000 small businesses, said surveys of hisassociation's members show continued profit improvements and a benigninflationary climate.

Professional investor Paul Tanico, managing partner of CastleRock Partnersin New York City, said Tuesday's action was little more than an exampleof what happens when vast armies of mutual fund managers decide to plungeback into the stocks they were selling a month ago. There is little long-termconviction in the market. (Tuesday's) move tells us little about the market'sfuture direction.

Today'sBusiness Index,

Markets soar on inflation news