* Small caps gain for fourth straight day
* Dow up 0.4 pct; S&P 500 up 0.6 pct; Nasdaq up 1.2 pct (Updates to close)
By Chuck Mikolajczak
NEW YORK (Frankfurt: HX6.F - news) , May 27 (Reuters) - U.S. stocks rose on Tuesday asthe S&P 500 scored a second straight record close, buoyed by thelatest round of merger activity and as expectations for ratecuts by the European Central Bank stoked investors' appetite forequities.
ECB chief Mario Draghi said on Monday the bank must be"particularly watchful" for any negative price spiral in theeuro zone. His comments increased bets that the bank was readyto cut rates next week to counter low inflation and weak lendingin the euro zone, keeping asset purchases as an option.
U.S. markets, which were closed Monday for Memorial Day, hadto digest the ECB news.
"(It's) a rate cut or some sort of nonconventionalstimulus," said Peter Cardillo, chief market economist atRockwell Global Capital in New York. "No question about it, wehad to catch up from yesterday."
The data also supported equities. Orders for durable goods,which are U.S. manufactured goods meant to last three years ormore, unexpectedly rose in April, and consumer confidence perkedup in May, backing views of a rebound in economic growth.
"Durable goods was what came out early and that set a verypositive tone for the market, especially since the prior numberswere revised sharply higher," said Tim Ghriskey, chiefinvestment officer of Solaris Group in Bedford Hills, New York.
"This is a lot of what the market has been talking about,which is the industrial side beginning to spend oninfrastructure, whether it is public or private, and just theindustrial side kicking in."
The Russell 2000 and Nasdaq Composite outperformed other major indexes on Tuesday, as they did handilylast week, indicating a rotation out of small caps and growthshares could be over. The Russell rose 1.4 percent, its fourthstraight advance and sixth gain in the past seven sessions.
The Dow Jones industrial average gained 69.23 pointsor 0.42 percent, to end at 16,675.50. The S&P 500 advanced 11.38 points or 0.60 percent, to 1,911.91, a record.The Nasdaq Composite added 51.26 points or 1.22 percent,to 4,237.07.
Shares of Hillshire Brands, known for sausages andlunch meats, surged 22.1 percent to $45.19 after poultryproducer Pilgrim's Pride offered to buy Hillshire in a$6.4 billion deal. Shares of Pinnacle Foods (NYSE: PF - news) , which Hillshire plans to buy, slid 5.4 percent to$31.48. Pilgrim's Pride gained 1.7 percent to $25.52.
Pfizer shares added 0.4 percent to $29.61 a dayafter the U.S. drugmaker walked away from its bid to buyAstraZeneca for nearly 70 billion pounds ($118 billion).U.S.-traded AstraZeneca shares dipped 0.3 percent to$72.05.
Volume was light, with about 5.38 billion shares traded onU.S. exchanges, short of the 5.8 billion average so far thismonth, according to data from BATS Global Markets.
Advancing stocks outnumbered declining ones on the New YorkStock Exchange by a ratio of 2 to 1, while on the Nasdaq, nearlythree stocks rose for every one that fell. (Reporting by Chuck Mikolajczak; Editing by Jan Paschal)
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