The stock market Monday was hotter than a wienie roast at high noon on the Fourth of July.

Investors returned from the long holiday weekend rested and ready to buy stocks. And did they ever. The rally was big and broad, particularly in the tech-laden Nasdaq composite index, which gained 3.4 percent and closed at its highest level in 17 months.

The run-up was the result of several pieces of good news, rather than a single, clearly defined catalyst, market experts said. The market has been on a four-month gallop and is beginning to lure in those who simply don’t want to miss the rally.

“The mind-set that is driving the market now is the fear of being left out,” said Hugh Johnson, chief investment officers at First Albany Corp. “Now this could be a false start, but I don’t think so.”

The Dow Jones industrial average gained 146.58 points, or 1.6 percent, to close at 9216.79. The Standard & Poor’s 500 index did even better, with an 18.72-point gain, or 1.9 percent, to close at 1004.42. And the Nasdaq soared 57.25 points to 1720.71.

The day looked promising for stocks, even before it began, because most of the overseas markets had rallied. The Japanese Nikkei 225 index, for example, closed up 2.6 percent, and all the European averages were up 1 percent to 2 percent.

“The Japanese market, which had been left for dead, has now hit a 10-month high, so maybe its economy is beginning to come back,” said Larry Wachtel, market analyst at Prudential Securities. “And that can only help the United States.”

Another piece of good news came from a survey by Goldman, Sachs & Co. that showed spending on information technology this year will be little changed from the previous year. The outlook in April called for a decline of 3.2 percent, so the latest survey showed at least the worst may be over in that sector.

Business spending is important to the continued growth of the economy and the stock market, because consumer spending can’t grow much faster than it already has over the last two years. Interest rates are at 45-year lows, prompting consumers to buy houses and cars.

In other words, consumer spending is just about tapped out, so businesses need to start spending if the economy is to grow at a faster pace, Wachtel said. “If we get to September or October and we still don’t see some evidence of increased business spending, there is going to be an awful sell-off,” he said.

Stocks were also pushed higher Monday by a report in London’s Financial Times that said software giant Microsoft Corp. may pay its shareholders $10 billion in dividends to reduce its $46 billion stash of cash, according to Bloomberg News. Shares of Microsoft, which is a component of the Dow, gained 92 cents, or 3.5 percent, to $27.42, Bloomberg reported.

This news provided a psychological boost to the overall stock market because it reminded investors that the tax rates on dividends and capital gains have been cut to 15 percent, said Barbara Marcin, portfolio manager of the Gabelli Blue Chip Value fund. Dividends basically are worth more now, she said.

“This news sort of reminded people that there is a good reason to invest in stocks,” Marcin said. “There are some things in place that support this rally, which I think has some staying power.”

Johnson of First Albany agreed that the rally, which has pushed the S&P 500 up 26 percent since March 11, looks like the real deal. Stock prices are rising; bond prices are falling; and corporate earnings are expanding.

The yield on the benchmark 10-year U.S. Treasury bond – which moves in the opposite direction to its price – has soared from just above 3 percent on June 13 to the current level of 3.7 percent. The higher yield reflects the notion that the economy will expand in the coming months, and that typically leads to higher prices and inflation.

“Rising stock prices and higher bond yields are symptoms of a bull market,” Johnson said.

Further, corporate earnings growth could be signaling an economic upturn. Profit for companies in the S&P 500 increased 5.3 percent in the second quarter, compared with the same period last year, according to Thomson First Call in Boston. About one-fourth of the companies in the S&P 500 release quarterly results in the next two weeks

Analysts estimate earnings growth of 13 percent this quarter and 21 percent in the fourth quarter. Perhaps more importantly, the pace of so-called negative preannouncements, in which companies issue warnings if they don’t expect to hit their earnings targets, is slower than usual for the second quarter.

“The feeling now is that we are going to get through the earnings season and be OK,” Wachtel said. “The preannouncement period was very tame, so investors are somewhat assured that companies will either hit or exceed their numbers.”

Still, much of the rally so far was built on the hope of better economic times in the second half of the year, as much as on any tangible evidence. If the economy stumbles, the market will quickly retreat and perhaps “retest” its bear market lows of last October, Wachtel said.

“This is almost a leap-of-faith advance,” he said. “The market presumes an improvement in the economy, but we really won’t know for sure until September or October.”

—

(c) 2003, The Dallas Morning News.

Visit The Dallas Morning News on the World Wide Web at http://www.dallasnews.com/

Distributed by Knight Ridder/Tribune Information Services.

AP-NY-07-07-03 1931EDT