Dow Leaps 94 Points on Budget Deal News

NEW YORK — Elated by the prospect of a capital gains tax cut and a deal to balance the federal budget, Wall Street closed out one of its best weeks in history with a broad stock market rally led by technology issues.

Even a report showing the lowest U.S. unemployment rate in 24 years--normally an inflationary signal--did not upset investors. The Dow Jones industrial average gained 94.72 points to end at 7,071.20--just 14 points shy of the all-time record set March 11. The Dow was up 332.33 points for the week--just under 5%--the biggest weekly point gain on record.

But the technology-heavy Nasdaq stock market--home of Microsoft, Intel and Cisco Systems--did even better, pulling out of its recent doldrums with a flourish. The Nasdaq composite index surged 34.83 points, or 2.74%, to 1305.33 on Friday, bringing its gain for the week to 7.9%. That is the index’s biggest daily point gain ever--surpassing the 33.18-point jump on July 17--and its best one-week gain in percentage terms in more than nine years.

The market surge came despite Friday’s report that the nation’s jobless rate in April dropped below 5% for the first time since 1973.

That sign of unexpected strength was balanced by a separate survey of businesses that showed modest payroll gains of 142,000 jobs in April and 139,000 in March, after large increases of 314,000 in February and 259,000 in January.

The Dow rose modestly on the job news, but then rocketed on news of a budget deal between President Clinton and congressional Republicans.

“The doubts about the budget deal and capital gains are gone, and that’s very, very important,” declared Peter Canelo, chief investment strategist for Dean Witter Reynolds.

Canelo said a capital gains tax cut is especially attractive to holders of Nasdaq stocks and may have played a major role in Friday’s surge. Since Nasdaq’s are mostly growth-oriented companies that don’t pay dividends, investors get all their returns from price appreciation, creating taxable capital gains when they sell. A lower tax rate puts money straight into investors’ pockets.

Bonds weren’t left out of Wall Street’s party, either, having their best week in nine months. The benchmark 30-year U.S. Treasury bond rose about one-quarter point, sending its yield to 6.89% from 6.92% on Thursday.

Short-term bonds also fared well, underlining investors’ feeling that the Federal Reserve Board may see no need to keep squeezing rates upward in an effort to choke off potential inflation.

Opinion is mixed about whether the central bank at its May 20 meeting will decide to boost its key short-term rate by another 0.25 percentage point, but Fed watchers seem to agree that it won’t need to do much more than that. The Fed raised the rate it charges banks for overnight loans to 5.50% from 5.25% on March 25.

Analysts said Friday’s report of modest job gains suggests some slowing in the momentum of economic growth from the decade-high rate of 5.6% in the first three months of 1997.

Technology stocks set the pace for Friday’s big gains. Shares of Intel climbed 3 7/8 to 157 5/8

Market Roundup, D4

* JOBLESS REPORT

Unemployment hits a 24-year low. A1

* BUDGET AGREEMENT

Clinton, Congress strike a deal to balance the budget. A1