- The Washington Times - Friday, March 17, 2000

The Dow Jones Industrial Average rocketed 499 points in its biggest-ever advance yesterday, aided by fresh evidence that an oil-driven surge in prices is not touching off a wider inflation problem.

The blue-chip index this week has enjoyed its best performance since the October 1987 stock market crash, as "old economy" stocks beaten down by worries about higher inflation and interest rates regained favor among investors looking for bargains and value.

The sheer momentum yesterday from the Dow's meteoric climb to 10,631 helped to pull the technology-laden Nasdaq Composite Index out of a three-day slump that had erased 11 percent of its value. The Nasdaq ended up 135 points at 4,718 on a hectic day of trading where a record 1.5 billion shares changed hands on the New York Stock Exchange.

"Today was fantastic. The Dow has been quite underloved in 2000," said Bryan Piskorowski, market analyst with Prudential Securities in New York, noting that investors have resumed their love affair with big blue-chip names like American Express, J.P. Morgan, 3M and DuPont.

While investors had gone too far in spurning those "old economy" stocks, they exuberantly had bid up the prices of "new economy" stocks in the biotechnology and semiconductor areas to unsustainable levels that led to the Nasdaq's plunge earlier this week, he said.

"We were paying for the sins of the past. But now Nasdaq has gone through this corrective dance and buyers emerged," he said.

While the outlook for the market looks brighter for now, he said, much depends on whether inflation raises its head in a critical consumer price report due out today. If that happens, it might force the Federal Reserve to raise interest rates more aggressively at a Tuesday meeting, analysts said.

"How long is the Fed going to keep raising rates? That's the mountain the Dow and old economy stocks have to climb," Mr. Piskorowski said. "The markets have been painfully aware of how high oil prices have been in the last month and a half."

Even with yesterday's spectacular 4.9 percent gain, the Dow is down 7.5 percent for the year. The Nasdaq, by contrast, is up 15.9 percent since Jan. 1, even after this week's losses.

Mr. Piskorowski and other analysts expect relief from sky-high oil prices to come after a March 27 meeting of the Organization of Petroleum Exporting Countries at which the oil exporters are expected to increase production by 1 million to 2 million barrels a day. Already, crude oil prices have declined in anticipation of the increased supply.

Meanwhile, the market took solace in a government producer price report yesterday showing that the huge surge in oil prices last month did not immediately ignite wider inflation. While gasoline prices jumped 12.9 percent and tobacco prices leaped 5.6 percent, prices were flat outside those areas, the Labor Department reported.

"That created a soothing mood for the market," Mr. Piskorowski said.

With core inflation excluding energy, tobacco and food prices at a tame 0.7 percent in the last year, "that certainly does not call out for any aggressive action by the Federal Reserve," said Mark Vitner, economist with First Union National Bank in Charlotte, N.C.

But he argued that excluding the latest oil price spike is not altogether realistic after a year of consistently higher energy prices.

"After all, consumers certainly are feeling the impact from higher energy prices," he said. "The impact is like that of a tax increase. Because consumers cannot easily cut back on gasoline purchases, they are left with less money to spend on everything else."

Elevated prices at the gas pump this summer should help the Fed in its campaign to cool the red-hot pace of consumer spending and economic growth, he said, "making the Fed's job a little easier."

One reason for yesterday's powerful rally was the hope that earlier interest rate increases already may be slowing the economy, preventing the need for strong action by the Fed beyond the quarter-point rate increase the markets already are expecting Tuesday, said Arun Kumar, senior U.S. equity strategist at Lehman Brothers in New York.

A report from the Fed this week showed a slowdown in production at the nation's factories. And yesterday, a separate report showed a drop in home-building permits last month, suggesting that the four rate rises already ordered by the Fed since June are starting to take effect, he said.

While Lehman Brothers had been expecting the Fed to double those rate increases in the coming months, the markets are hoping that won't be necessary, he said.

"The market has a way of sniffing out what is going to happen," he said. "The inflation indicators are showing there's nothing there except oil and commodity prices."

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