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Sat, Jun 17, 2000
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Strong Productivity, Signs of Broad Strength Cheering Wall Street
By Thomas Lepri

Stocks were rallying hard at midday amid the latest evidence that the U.S. workforce is still gettin' it done, and at very affordable rates.

Major Indices
+0.6% 10,974.04
S&P; 500
+0.8% 1436.19
+1.6% 4389.61
Russell 2000
+0.6% 535.33
TSC Internet
+1.2% 1151.08
30-Year Treasury
1 1/32
98 4/32 6.265%

Chalk the strength up to today's report on productivity, which the Labor Department said grew a whopping 5% in the fourth quarter, well above the expected 4.2% clip and matching the previous quarter's revised increase. Meanwhile, unit labor costs dropped by a full percentage point, confounding expectations for an increase of 0.8% and extending the revised 0.3% drop in the third quarter.

An economy growing well above the Federal Reserve's comfort level needs productivity gains like that to keep wage pressures in check. But declining labor costs? That's gravy.

"That's huge," said Tony Dwyer, chief market strategist at Kirlin Holdings, of the data. "When you get a number like that, it's good for the whole market, because it suggests that valuations can remain high."

Because it erodes the present value of future earnings, inflation is the natural enemy of high price-earnings multiples. So today's numbers have done as much as any bull could have hoped to quell fears raised by recent spikes in the implicit price deflator and Employment Cost Index, though it won't likely change the near-term direction of the Fed, which the market is widely betting has yet to finish tightening.

Nonetheless, Dwyer sees brighter days ahead for the broader market. "The broad market has been in a bear market for the last year and a half," he said. "That's obviously the result of rates. The broad market has been trading on interest rates, and tech stocks have been trading on earnings and revenue growth. If you fix the interest rates, you put in a bottom in the broad market. I think that's what's going to happen."

Near midday, multiples were expanding in a fairly wide range of sectors, including drugs, biotechs, banks, brokers, utilities and paper products. But out in the vanguard was Old Familiar, the already far-stretched technology sector. The Nasdaq Composite Index was pushing further into record territory, up 68, or 1.6%, to 4390, and getting serious participation from big-cap monsters Microsoft, Intel and MCI WorldCom.

The other big-cap proxies also were solidly positive. Propelled by financial components American Express and J.P. Morgan, the Dow Jones Industrial Average was up 68 to 10,974. The S&P; 500 was 12 higher to 1436.

Investors would do well to keep the market's broadening in perspective: Breadth was narrowly positive among both three-letter and four-letter issues. That's far from great. Still, it's not bad, especially considering how much money investors have made in the face of less-than-stellar market internals. "The last couple thousand points on the Dow have been in this type of environment," said Brian Belski, chief investment strategist at George K. Baum in St. Louis, Mo. "So you need to look at other trends as well."

And those trends look somewhat encouraging. "We have more groups within the S&P; 500 showing good relative strength numbers than we've seen in a long time," Belski said. "More than are showing decreasing relative strength. A lot of groups are starting to participate or improve."

TheStreet.com Internet Sector index was up 14, or 1.2%, to 1151, while the small-cap Russell 2000 was 3 higher to 535.

The bond market was holding up well despite the unseemly strength in equities, with the 30-year Treasury up 1 1/32 to 98 4/32, putting its yield at 6.27%. The 10-year note, meanwhile, was up 4/32 to 95 20/32 and yielding 6.63%. (For more on the fixed-income market, see today's Bond Focus.)

Market Internals

Breadth was narrowly positive amid booming volume.

New York Stock Exchange: 1,460 advancers, 1,426 decliners, 623 million shares. 110 new 52-week highs, 87 new lows.

Nasdaq Stock Market: 2,209 advancers, 1,787 decliners, 1.2 billion shares. 324 new highs, 51 new lows.

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