FINANCIAL MARKETS : Dow Breaks Record; Bonds Rally

Blue-chip stocks soared to a record high Thursday as fresh evidence that the economy is slowing fueled hopes of an interest rate cut by the Federal Reserve Board.

The Dow Jones industrial average ended up 41.91 points at 4,808.59, beating the old record of 4,802.45 set on Oct. 19.

Treasury bond prices rose, pushing long-term yields to 21-month lows, as data pointing to an unsteady economy and a belief that lawmakers will be able to reduce the federal budget deficit drove interest rate optimism.

In the broader market, advancing issues led decliners 13 to 7 on active volume of 396 million shares on the New York Stock Exchange.

The Nasdaq composite index soared 16.82 points to 1,057.32.

“There are hopes for a rate cut,” said David Shulman, chief equity strategist at Salomon Bros. “Friday’s October employment report should tell whether the Fed will go sooner or later, but we’ve been in the later camp.”

The rally was broad. More than two shares rose for every one stock that fell on the NYSE.

Gains in retail, semiconductor and regional bank shares led the Standard & Poor’s 500-stock index to its highest level in two weeks. The index, which represents 74% of the value of all U.S. stocks, climbed 5.50 points to 589.72.

Retail stocks drew buying despite weak October sales.

U.S. retailers reported weak sales because warmer weather has discouraged people from buying cold-weather clothing. The Standard & Poor’s retail stores index jumped 6% to 47.71. The index slipped 1.5% in the past six months, falling short of the broader index’s 13.5% gain.

“The sales were disappointing but stocks have already discounted the worst-cases scenario including what we expect to be probably the worst Christmas in a decade,” said Phil Orlando, a senior vice president at First Capital Advisers.

Another area of buyer enthusiasm was in airlines, rails and freight companies, which catapulted the Dow Jones Transportation Average up 60.56 points to 1,985.44.

Analysts said Wall Street also was betting Republicans will win out in the budget battle with the White House, which would be positive for stocks and interest rates.

“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,” said Eugene Peroni, chief technical analyst at Janney, Montgomery Scott.

On Wednesday, the National Assn. of Purchasing Management Index of manufacturing activity for October came in at 46.8, down from 48.3 a year ago, and was the third consecutive monthly decline. A reading below 50 indicates manufacturing is contracting and one above signals expansion.

Bond investors interpreted the data as indicating the economy is weakening, pushing the 30-year Treasury bond yield to 6.24% from 6.29% late Wednesday. The last time the yield was lower was Jan. 31, 1994, when it stood at 6.23%.

Yields on three-month T-bills held at 5.46% as the discount was unchanged at 5.31%. Six-month yields fell to 5.44% as the discount dropped 0.03% point to 5.22%. One-year yields fell to 5.40% as the discount lost 0.05 point to 5.12%.

Among Thursday’s market highlights:

* Shares of many retailers gained as companies posted October sales, even though the results showed consumers aren’t picking up their sluggish spending ahead of the holiday season. Shares of Dayton Hudson, which said same-store sales increased 0.7%, sprinted 5 1/4, or 8%, to 7 7/8. Sears strengthened 1 1/4 to 36 1/8, after posting a 4.6% jump in sales from stores open at least a year. Gap, which surged 3 7/8 to 42 3/8 after same-store sales rose 2%. Kmart rose 7/8 to 9 3/8 after same-store sales were up 2.4% and Wal-Mart rose 1 1/4 to 23 1/2.

* Big gainers on the NYSE included International Business Machines, up 2 3/4 to 99 5/8; Motorola, up 2 1/4 to 67 1/4; and Advanced Micro Devices, up 1/2 to 23 1/4. In Nasdaq trading, Intel led in volume and rose 2 to 72 7/8.

* Internet-related stocks lead the charge in technology stocks. Spyglass surged 13 3/4 to 70 1/2 after the maker of software for users of the Internet on Wednesday posted stronger-than-expected results for the latest quarter. * United Airlines’ parent UAL gained 7 3/8 to 184 3/4. The company said it will decide by next week whether it wants to pursue buying USAir, which rose 3/8 to 14 1/4. Federal Express rose 4 1/8 to 86, American Airlines’ parent AMR climbed 3 1/4 to 70.