What Plunge? Stocks Back Near Highs Hit In July

After a tumultuous and brutal August, the stock market has regained its footing and is within striking distance of the record highs it set in July.

The surge began building before the Federal Reserve cut interest rates last week and has come at a time when news from the housing market remains bleak.

Conditions in the debt markets have eased somewhat, but specialists say they remain much tighter than they were earlier this year.

Since Aug. 15, when the stock market hit its lowest point in five months, the Standard & Poors 500-stock index is up 8.5 percent and the Dow Jones industrial average 8 percent. The increase has erased much of the decline from late July and early August and left the indexes up modestly for the third quarter, which ended yesterday.

Its kind of amazing how well equities have held up, said Douglas M. Peta, chief market strategist at J. W. Seligman & Company, an investment firm in New York.

If you went away sometime in July and came back about now, you might say, Nothing happened while I was gone, he said.

In yesterdays trading, the main indexes fell slightly, with the S.& P. 500 down 4.63 points, or 0.3 percent, to 1,526.75. The Dow slipped 17.31 points, or 0.12 percent, to 13,895.63, and the Nasdaq fell 8.09 points, or 0.30 percent, to 2,701.50.

That still left the Dow and the Nasdaq with gains of more than 11 percent this year, and the S.&P. up 7.7 percent for the year.

The market appears to be buoyed by a belief that the problems in the housing and credit markets will not pull the broader economy into a recession and that growth in Asia and Europe will help offset those ill effects. The optimism is most vividly manifest in the performance of foreign markets, particularly in the fast-developing countries like China and India.

A widely followed Morgan Stanley index that tracks emerging markets is up 26 percent since Aug. 16, when it hit a low. Markets in developed countries excluding the United States are up nearly 12 percent in the same period.

Even in the United States, the markets return has been led by sectors like energy, industrials, materials and technology, which investors believe are best positioned to take advantage of the growth abroad.

The financial and consumer discretionary sectors have lagged; they are seen as having the most to lose from a declining housing market and slowing consumer spending domestically.

Indeed, investors in September poured $1.1 billion into mutual funds that specialize in emerging markets, while they withdrew about $3.2 billion from domestic equity funds, according to AMG Data Services, a research firm.

Expectations that the rest of the world will outperform the United States are also reflected in the depreciating dollar, which dropped yesterday to $1.4265 against the euro, a new low. The dollar has fallen 2.8 percent against the euro since Sept. 14, when the Fed cut rates and is down 8 percent for the year. Gold prices rose 1.4 percent, to $742.80 a troy ounce, the highest since 1980.

Currency traders, and others in the financial markets, are operating under the assumption that central bankers in Washington have taken a more activist and accommodating stance.

That view started to take hold in mid-August when the Fed cut the discount rate — what it charges banks to borrow directly from it. Investors became even more convinced last week when the Fed cut its benchmark rate by half a point, to 4.75 percent, rather than the expected quarter point.

The futures market is now predicting that the Fed will cut rates at least once more, to 4.5 percent, at its meeting on Oct. 30 and 31.

But one Fed official, William Poole, said yesterday that it would be a mistake for markets to bake into the cake the assumption of ongoing rate cuts, according to Bloomberg News.

Mr. Poole, president of the Federal Reserve Bank of St. Louis, responding to a question after a speech in New York, said he was expressing his own views and not speaking for the Fed.

In the credit market, the Feds rate cutting and its lending at the discount rate and through open market operations have eased the logjam somewhat.

This week, banks raising money for the private equity buyout of the First Data Corporation, a credit card processor, were able to sell more debt than they had planned.

Still some of the roughly $300 billion debt backlog that needs to be sold may never be worked off. The private equity acquisitions that are falling apart or being withdrawn include the purchases of the student loan provider Sallie Mae and Harman International Industries, a maker of high-end audio speakers.

You still have a big overhang of supply out there, said Eric G. Takaha, director of corporate and high-yield debt at Franklin Templeton, the investment company. But the path has become a little clearer.

One mortgage company, Thornburg Mortgage, said the market for jumbo home loans — those with a face value of more than $417,000 — appeared to be improving. In recent weeks, investors have been more willing to buy bonds backed by pools of the mortgages, but are demanding higher returns and more safeguards against default.

Home buyers searching for jumbo loans will notice a slight drop in interest rates but will have to shop around, said Larry A. Goldstone, president and chief operating officer at Thornburg, based in Santa Fe, N.M.

The market has improved modestly and it is certainly not deteriorating, Mr. Goldstone said. I think it has a ways to go before its back to functioning in a completely normal way.

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