Stock Rally on Tax-Cut Hopes

The major indexes posted hefty gains on investor optimism that Bush's $600 billion stimulus package will boost the economy

Stocks ended Monday's session with impressive gains on reports of President Bush's proposal for an economic stimulus plan, which is expected to include $600 billion in tax cuts.

The Dow Jones industrial average added 171.68 points, or 2%, to 8,773.37. The broader Standard and Poor's 500-stock index climbed 20.51 points, or 2.26%, to 929.10. The tech-laden Nasdaq composite index moved ahead 34.21 points, or 2.47%, to 1,421.29.

On Tuesday, the President is expected to provide more details on his stimulus package in a speech at the Economic Club of Chicago. White House officials have signaled that Bush would propose a cut in taxes on corporate dividends, which would help boost company profits.

Hopes for Bush's plan offset worries over the increased likelihood of war with Iraq. In a speech Monday, President Saddam Hussein balked at U.S. threats to disarm Iraq and said his country is ready for war.

Also helping the market, JP Morgan strategists raised their rating on U.S. stocks to 'overweight' from 'neutral' on proved outlook for stock market performance in 2003. And the Baby Bells had major gains after federal regulators looked to change rules about local phone competition.

On the economic front, a report showed a slight decline in the pace of activity in the service sector in December. The Institute for Supply Management's non-manufacturing index slipped to 54.7 on the month from 57.4 in November. The new orders component dropped to 56.3 from 58.0, while employment improved to 46.9 from 45.9. Economic research outfit MMS International notes that the services sector continues to grow at a decent clip.

Investors will have a pile of other economic data to analyze this week, including the November update on factory orders Tuesday, consumer credit on Wednesday, and wholesale inventories on Thursday. On Friday, data on unemployment, hourly earnings and nonfarm payrolls will take the spotlight.

In corporate news, Dow stock AT&T (T ) warned it will cut 3,500 jobs and take $1.54 billion, or $1.75 per share, in charges in the fourth quarter, including two yet-to-be declared charges of $440 million, or 35 cents per share. The charges will cover the job cuts, its investment in AT&T Latin America and high-speed Internet network.

Telecom service providers gained ground after a report said that regulators were planning to stop allowing local phone companies to rent their networks at cheap rates. The move could reduce competition and pricing pressure for companies like Dow component SBC Communications (SBC ). SBC jumped 7.8%, while Verizon gained 7.9%, BellSouth rose 9.4%, and Qwest jumped 10%.

The first fourth-quarter 2002 earnings reports should begin to trickle in this week. The most noteworthy release: Dow component Alcoa (AA ), expected Wednesday.

Oil prices, which have been soaring on worries about supply, pulled back from two-year highs Monday after the OPEC cartel said it would make increase output to cover lost supplies from Venezuela. Says The Bank Credit Analyst, in a report today, noted that oil officials from Russia and Saudi Arabia reportedly met over the weekend to discuss lifting output, but "there is little scope for sustained price relief, unless all pumps are running at full tilt."

Treasury Market

U.S. Treasuries ended lower in price Monday as stocks rallied. The market's reaction to the slightly worse-than-expected ISM services report was blunted by a drop in December job cuts announced by Challenger and strength in stocks, says MMS International. Concerns that President Bush's $600 billion stimulus plan would widen the deficit also weighed on Treasuries.

World Markets

European stocks ended mostly higher as gains in U.S. stocks reversed some earlier selling caused by geopolitical worries. In London, the FTSE index fell 3.50 points, or 0.09%, to 4,001.40. Paris' CAC-40 index finished up 22.39 points, or 0.70%, to 3,210.27. In Frankfurt, the DAX index added 50.25 points, or 1.62%, to 3,143.19.

In Asia, stocks rose in a New Year's rally. Japan's Nikkei 225 index finished the day up 134.38 points, or 1.57%, to 8,713.33. Hong Kong's benchmark Hang Seng index added 82.11 points, or 0.86%, to 9,665.93.

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