NEW YORK (CNNmoney) - U.S. stocks rallied Monday, sending the Nasdaq composite index to a nine-week high as investors bet falling interest rates will lift the economy from its worst slump in a decade.
The Federal Reserve Tuesday is expected to cut short-term borrowing rates, possibly to 40-year lows, six days after the Treasury Department moved to cheapen the cost of long-term loans.
Elsewhere, a multibillion-dollar stimulus package is working its way through Congress at a time when oil prices are near two-year lows.
"There's nothing left in the bag," said Mike Farrell, portfolio manager at David L. Babson, who expects a mortgage refinancing boom because the Treasury's elimination of the 30-year bond last week sent yields tumbling.
Monday's gains handed the Dow Jones industrial average its third-highest close since Sept. 11.
"We've come very far, very fast," said Farrell, who is not convinced the advance is sustainable.
Investors again ignored bad economic news. A measure of the nation's services sector fell to a record low last month, while a survey of announced layoffs showed that companies cut more than 240,000 jobs in October.
But Wall Street appears upbeat about the future. Merrill Lynch said Monday it expects strong economic growth later next year, following several quarters of weakness. And Cisco Systems rallied despite expectations for a weak profit report after the market closes. The maker of computer networking gear ultimately posted falling profits that exceeded expectations.
"I'm very optimistic, looking out a year or two," Vince Farrell, chairman of Victory SBSF Capital Management told CNNfn's Halftime Report.
The Nasdaq rose 47.92 points, or 2.7 percent, to 1,793.65, its best finish since Aug. 31, when the index closed at 1,805.43. The Dow industrials added 117.49, or 1.3 percent, to 9,441.03, while the Standard & Poor's 500 gained 15.59, or 1.4 percent, to 1,102.81.
More stocks rose than fell. On the New York Stock Exchange, advancing stocks topped declining ones by a nearly 2-to-1 margin as 1.18 billion shares changed hands. Nasdaq winners topped losers 3-to2 as 1.7 billion shares traded.
In the currency market, the dollar advanced against the euro and yen. Treasury prices continued to gain.
Tenth time a charm?
The Federal Reserve Tuesday is expected to cut interest rates for the tenth time in 11 months in an effort to stimulate an economy that last quarter saw its worst performance since early 1991.
The question is one of size. In a Reuters poll, 15 of the 24 primary dealers of U.S. government securities predicted the policy-setting Federal Open Market Committee will lower the federal funds rate by half a percentage point.
The other nine firms are betting on a quarter-point cut, taking the rate for overnight lending between banks to 2.25 percent, down 4.25 percentage points in less than a year.
The fed funds futures contract has priced in a better-than-50 percent chance of a larger half-point cut, to 2 percent, its lowest since 1961.
Long-term rates have also fallen, thanks to the Treasury Department, whose plan last week to do away with the 30-year bond set off a bond-buying spree that pushed yields to three-year lows.
"That means more money in people's pockets," Muriel Siebert, founder and CEO of Muriel Siebert & Co, told CNNfn's Market Call. "If it gives them more cash to spend and pay off their credit card debt or buy other things, it can give the economy a nice pop."
Lower rates also make fixed-income securities less attractive than stocks.
"You are not getting paid to hold cash anymore," Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum, told CNNfn's Before Hours. "I think if you look at it from that perspective you see an asset allocation switch going on, which is helping this rally."
Economically sensitive stocks rose, including 3M (MMM: up $2.30 to $110.50, Research, Estimates), Citigroup (C: up $0.34 to $47.27, Research, Estimates) and General Motors (GM: up $1.53 to $43.78, Research, Estimates).
Nasdaq's most-actively traded stock, Cisco Systems (CSCO: up $0.64 to $17.90, Research, Estimates), rose 3.7 percent. After trading ended, Cisco said fiscal first-quarter earnings per share fell 77 percent, topping forecasts. But from its all-time high above $80 last year, Cisco stock has already declined 77 percent.
The 18 states suing Microsoft are reportedly not ready to sign off on the settlement deal between Microsoft and the Justice Department. But that didn't hurt Microsoft (MSFT: up $1.87 to $63.27, Research, Estimates) shares, which rose 3 percent.
Walt Disney (DIS: up $0.29 to $19.16, Research, Estimates) also rose. The co-producer of "Monsters, Inc." took in $63.5 million this weekend in ticket sales, a record for an animated movie. But the film's maker, Pixar Animation Studio (PIXR: down $1.75 to $34.95, Research, Estimates), tumbled after a downgrade.
An autumn of gains
Though lower on the year, the major stock indexes have rallied over the last seven weeks. Since Sept. 21, the end of the first week of trading following the terrorist attacks, the Dow industrials are up 14.6 percent while the Nasdaq has advanced 26 percent.
Autumn's gains come despite dismal economic news. In the latest, the National Association of Purchasing Management said its index measuring the service economy dropped to an all-time low in October.
Last week, NAPM's manufacturing index slipped for the fifteenth straight month in October while other reports showed slumping consumer sentiment and rising joblessness.
Economists at Merrill Lynch on Monday cut projections for the economy, which they now see contracting 1.5 percent this quarter and 1 percent the next. But the firm sees a strong rebound coming, forecasting a 5 percent jump in the second half of 2002.
The Federal Reserve isn't the only central bank meeting this week. Both the Bank of England and the European Central Bank could lower borrowing costs by Thursday.
"There's a lot of optimism that this stimulus is going to work," William Sullivan, senior economist at Morgan Stanley, told CNNfn's Street Sweep, referring to lower rates, falling taxes and rising government spending. 
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