Stocks Rally in Face of Fed Rate Hike; Yields Mixed

Stocks rallied Tuesday on the eve of today’s expected Federal Reserve interest rate increase, while the bond market ended mixed.

The Dow Jones industrial average rose 100.52 points, or 0.9%, to close at 11,041.05, building on its 201-point gain Monday.

The Nasdaq composite index surged 111.63 points, or 2.8%, to 4,051.98, its sharpest point gain since Jan. 7.

In the broad market, winners topped losers by 17 to 13 on the New York Stock Exchange and by 23 to 18 on Nasdaq.

Some buyers Tuesday were making a statement that, despite higher interest rates, the economy and corporate profits will continue to grow, analysts said.

“The earnings story continues to come in very strong across the board,” said Chris Wolfe, equity market strategist at J.P. Morgan’s private client group.

The Fed today is expected to announce another increase in its key short-term rate. Analysts expect at least a quarter-point increase and possibly a half-point hike.

An announcement is expected just after 11 a.m. Pacific time.

In the bond market Tuesday, longer-term yields continued to slide--despite a report showing rising inflation pressures in the manufacturing sector.

The benchmark 30-year Treasury bond yield fell to 6.43% from 6.49% on Monday. But the one-year T-bill yield rose to 6.27% from 6.25%.

The split performance of short- and long-term yields suggests that some bond investors believe the Fed “is going to keep raising rates” until there are signs of slowing economic growth, said Kent Gasaway of Kornitzer Capital Management.

But that also could mean weaker corporate profits--a potential problem for stocks.

On Tuesday, however, investors poured into major tech stocks without fear. Cisco Systems soared $8.31 to a record $117.81, Qualcomm rose $9.06 to $136.06 and, buoying the Dow, Microsoft gained $5.06 to $102.94.

Strong earnings among more traditional companies also sparked the market. Tricon Global Restaurants, which operates the Pizza Hut, KFC and Taco Bell chains, rose $2.13 to $30.75 after beating analysts’ profit estimates for the fourth quarter and the year.

Elsewhere outside the tech sector, General Motors rose $4.69 to $85.25, Wal-Mart rose $3.94 to $58.69 and Home Depot jumped $5.38 to $62. All three are in the Dow index.

Among the day’s highlights:

* Financial stocks were mixed. American Express rose $4.25 to $169, Chase Manhattan jumped $3.06 to $83.75 and Citigroup added $1.25 to $58.25, but Lehman Bros. slipped $1.31 to $70.

* Merck fell for the first time in six sessions. Shares of the No. 1 U.S. drug maker dropped $1.81 to $76.81. Johnson & Johnson fell $1.25 to $84.81.

* Entertainment and media stocks were hot. Univision gained $2.88 to $110, Comcast rose $1.13 to $44.25 and Fox Entertainment rose 88 cents to $24.38.

* Among Southern California stocks, Broadcom surged $7.44 to $296.75, IDEC Pharmaceuticals rose $6.75 to $132.94, MiniMed rallied $6.25 to $83.38 and Vitesse Semiconductor increased $3.25 to $46.75.

But HomeStore.com sank $7.44 to $90.13 and MP3.com declined $1.06 to $27.19.

* Alaska Air eased 13 cents to $31.75 after trading at a new 52-week low of $29.50 in the wake of the crash of one of its jets.

* Several initial public offerings soared in their Nasdaq debuts as the IPO market continued to sizzle. Sequenom (ticker symbol: SQNM) jumped $53.25 to $79.25, Turnstone Systems (TSTN) surged $68 to $97, Quantum Effect Devices (QEDI) soared $40.50 to $56.50, Skillsoft (SKIL) rose $4 to $18 and Impsat Fiber Networks (IMPT) gained $12 to $29.

* Better-than-expected earnings lifted SDL. The stock jumped $19.50 to $278.69 after the maker of lasers and other parts used in fiber-optic communications equipment said fourth-quarter profit more than tripled.

Overseas, Germany’s DAX index surged 3.1% and France’s CAC-40 rose 2%, rebounding from heavy losses Monday.

Japan’s Nikkei dipped 0.6%, while Latin American indexes gained. The Mexican market advanced 2.4%.

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Market Roundup, C10