Dow rallies in anticipation of tax cuts

Investors’ anticipation of a tax cut reignited the New Year’s rally on Wall Street today, sending stocks higher and lifting the Dow Jones industrials more than 170 points.

Wall Street expected President George Bush, who is announcing an economic stimulus package tomorrow, to propose a cut in taxes on dividends to encourage more investment and give consumers more cash to spend.

“That is certain to be a big boost to the stock market,” said Peter Cardillo, president and chief strategist of Global Partner Securities Inc.

The Dow closed up 171.88, or 2%, at 8,773.57. The Dow claimed its second triple-digit win in three sessions, having surged 265.89 points on Thursday on an unexpected jump in the manufacturing sector.

The first three days of 2003 have represented the Dow’s second best start yet to a new year with a gain of 5.2%, according to Markethistory.com, a financial research Website. The Dow had its best three-day New Year’s rally in 1938 when it climbed 7%.

The broader market also rallied. The Nasdaq composite index rose 34.18, or 2.5%, to 1,421.26. The Standard & Poor’s 500 index advanced 20.44, or 2.3%, to 929.03.

Investors are hopeful that Mr Bush will propose a series of tax cuts that will pull the US economy out of its doldrums and will help the market break its three-year losing streak. The president is expected to propose reducing taxes paid by individuals as well as eliminating the taxation of investor dividends. The entire plan would amount to 600 billion in tax savings over 10 years.

Conservative politicians and Wall Street have long criticised the double taxation of dividends – first with corporations paying corporate income taxes on the earnings it pays in dividends and then by investors paying taxes on the dividends they receive.

Stocks that pay dividends, particularly big-name blue chips, were among today’s winners. IBM rose 1.94 to 83.59 and Exxon Mobil advanced 88 cents to 36.38.

Chip equipment makers contributed to the tech sector’s gains following an upgrade by Deutsche Securities. Novellus soared 2.37 to 33.57 and Applied Materials climbed 88 cents to 15.41.

Other issues managed to rise despite negative news, an indication of how energised investors were feeling. Biogen advanced 45 cents to 41.85 following a downgrade from Salomon Smith Barney.

Analysts also credited Wall Street’s advance to an upbeat outlook for fourth-quarter earnings, which companies begin releasing in earnest in two weeks.

“There has been a shortage of reductions in fourth-quarter (profit) expectations so far and a lot of people had anticipated a lot more,” said Ned Riley, chief investment strategist at State Street Global Advisors.

The gains also followed an economic report from the Institute of Supply Management. The group reported that its index of non-manufacturing business activity stood at 54.7 in December, down from 57.4 in November and below analysts’ expectations for a reading of 55. Still, a number above 50 indicates expansion in business.

Advancing issues outnumbered decliners more than 3 to 1 on the New York Stock Exchange where trading was moderate.

The Russell 2000 index, which tracks smaller company stocks, rose 6.69, or 1.7%, to 397.00.