A powerful rally in the bond market yesterday triggered a late surge in the stock market that sent the Dow Jones industrial average to its first-ever close over the 1,700 mark, giving Wall Street's most closely watched fever chart a 400-point gain in nine months.
It took only 14 trading days for the DJIA to move from 1,600 to the 1,700 mark, an indication of the strength of the recent stock market rally.
The DJIA closed at 1,713.99, up 17.09 points on heavy New York Stock Exchange volume of 181.7 million shares, the fifth-busiest day in the exchange's history. Advancing stocks led decliners 3 to 1.
"The bond market went beserk on the upside," declared Larry Wachtel, market strategist at Prudential Bache. Prices for March futures on U.S. Treasury bonds moved up their one-day limit of two points, an event Wachtel described as "very rare." The price change represented $20 for every $1,000 of face value.
The bond market's enthusiasm, Wachtel said, reflected the belief that inflation has been buried by falling oil prices. It also mirrored the continued drop in interest rates, which move in the opposite direction from bond prices. Yields on 30-year U.S. government bonds -- now about 8.4 percent -- are at their lowest level in seven years.
The bond market, Wachtel said, also was listening to rumors that Japan and West Germany might lower their interest rates.
The brisk pace set by the DJIA has taken market-watchers into what Wachtel called "uncharted territory," wiping out many of their trusty yardsticks for measuring the market. Stocks, Wachtel said, "are as overbought [overpriced] as ever and yet every day, they get more overbought . . . The only thing that will stop this market is a rise in rates, and I don't know when that's going to happen."
The Dow's drive through the 1,700 mark mirrored other market indicators that generally give a better indication of overall market activity. Nasdaq composite index for the over-the-counter market gained 2.79 to 358.06. At the American Stock Exchange, the market value index closed at 255.79, up 1.47. Standard & Poor's index of 400 industrials rose 2.66 to 250.18, and S&P's 500-stock composite index was up 2.73 at 226.77.
Charles Comer, market strategist at Oppenheimer & Co., reflected the prevailing mood of astonishment among investment analysts. "Every day, it seems there can't be any more good news and every day there's good news," he said.
Comer noted that oil prices dropped again yesterday and that the market staged an unusual rally in the face of a $2.38 drop in IBM shares, normally the market's bellwether stock. IBM was hit when analysts at Merrill Lynch and Solomon Brothers trimmed their earnings estimates for the company and lowered their recommendations on the stock.
In the current bull market, new records have come quickly in recent months. On May 20, 1985, the DJIA average closed above 1,300 for the first time. It took the Dow only 24 trading days to move from 1,400 to 1,500 and only 39 days to go from 1,500 to 1,600. The move to 1,700 took only 14 trading days.
Even as investment professionals marveled at the market's upward sweep, they noted that the percentage gains were less impressive. A move on the DJIA from 900 to 1,000 is an 11.1 percent gain. A move from 1,600 to 1,700 is a pickup of only 6.2 percent. However, market volume, once considered heavy at 50 million shares, is now considered light at 125 million shares.
Because a major part of the market's gain yesterday came in the last half hour of trading, some observers said they believed computer-driven buying programs helped spur the action. However, other observers said that only a few buying programs were in evidence yesterday. They said the spreads between the Standard & Poor's 500 stock index and the S&P futures contract on that index were too narrow to make arbitrage programs profitable.
In market action, energy stocks took new losses. Exxon dropped 1 5/8 to 52 3/8; Amoco 1 3/8 to 59 3/8; Chevron 1 1/8 to 36 7/8, and Atlantic Richfield 1 1/8 to 53 3/8