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Stock Analyst Update

Nasdaq Enjoys Best Week Ever

Investors cheer lessening of upward pressure on interest rates.

A strong, broad rally in the stock market Friday capped off a week of reports indicating the economy may be cooling off as a result of a series of Federal Reserve interest-rate increases. If that is the case, it means the Fed may be near the end of its current series of interest-rate hikes, which began nearly a year ago.

The Nasdaq Composite Index gained 6.4%, or 230.88 points, to finish off its best week ever at 3,813.38. The Dow Jones Industrial Average of blue chips rose less dramatically, climbing 142.56 points, or 1.3%, to 10,794.76.

Friday’s spurt lifted the Nasdaq index's gain for the holiday-shortened week to 18%. In the first three weeks of last month, the tech-heavy Nasdaq had lost 20% of its value as investors proved skittish over future interest-rate hikes. Since then, the index has regained all of those losses, although it is still down more than 6% for the year.

The Standard & Poor’s 500 Index on Friday rose 28.45 points to 1,477.26, a 2% gain. The Russell 2000 Index of smaller companies ended 4.2% higher, up 20.56 points to 513.03.

Friday’s rally was characterized by a sharp increase in trading volume, signaling a return to the market by many investors who had been waiting on the sidelines for further interest-rate direction. The New York Stock Exchange and Nasdaq market ended Friday on heavy volume after skipping through the week on lighter-than-average trading.

Friday's news of a higher unemployment rate in May capped a week of indications that the Fed's policy of higher interest rates was starting to take some of the steam out of the economy. It followed reports earlier in the week of slowdowns in new-home sales, manufacturing activity, and construction spending.

Friday’s buying spree was also characterized by how broad-based it was. Most industry sectors rose, while advancers led decliners by almost three to one. The number new highs to of new lows ended up four to one on the NYSE and almost three to one on the Nasdaq.

Among the many sectors gaining were airline stocks. Speculation over more consolidation in the industry gave a lift to Northwest Airlines . News reports indicating the nation’s fourth-largest carrier is in talks with American Airlines parent AMR  about a possible merger sent shares of Northwest soaring 21.9% to 35 7/16.

The belief that a number of Internet issues may have been recently oversold was a good enough reason to pile back into some of the stocks, but positive remarks from a couple of noted analysts gave a boost to the sector as well. Among the stocks powering the sector higher were (AMZN), up 15.3% to 57 7/8, and Yahoo , rising 12% to 134 ½.

Hopes for a continued increase in trading volume gave a boost to shares of broker dealers. Leading the pack were Charles Schwab (SCH), rising 17.9% to 33 5/8, and online broker E*Trade group , 12.2% higher at 18 3/8. A halt to interest-rate increases, which diminish profits in trading and underwriting revenues, benefits securities dealers.

As well, shares of financial stocks rose in advance of a friendlier interest-rate environment. Financial-services giant Citigroup (C) hit a new 52-week high of 66 7/8 early in the session before closing at 66, up 4.2%. In addition, American Express (AXP) rose 4.8% at 56 1/2, and J.P. Morgan (JPM), gained 5.2% to 138 13/16.

Mark Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.