U.S. Stocks Close Sharply Ahead, Dow Scores Biggest Gain In Years
NEW YORK (MarketWatch) -- U.S. stocks surged Tuesday, sparking the Dow's greatest one-day rise in nearly five years, after the Federal Reserve gave Wall Street what it's been clamoring for, cutting benchmark interest rates even more than most analysts had predicted.
"The market is acting like [Federal Reserve Chairman] Ben Bernanke just cured cancer, and I can tell you, he didn't," said Art Hogan, chief market strategist at Jefferies & Co. "This is typical of the knee-jerk reaction to what we perceive to be good news."
Up more than 70 points before the Fed's move, the Dow Jones Industrial Average quickly ascended in its aftermath, closing up 336 points, or 2.5%, at 13,739.4, with all but one of its 30 components ahead.
The Dow's rise marked its largest one-day jump since Oct. 15, 2002, and its biggest percent rise since April 2, 2003.
The broader indexes also soared, with the S&P 500 Index up 43.13 points, or 2.9%, at 1,519.78 and the Nasdaq Composite Index was up 70 points, or 2.7%, at 2,651.66.
At the New York Stock Exchange, volume topped 1.6 billion shares, and advancing stocks outdid decliners nearly 10 to 1. At the Nasdaq, more than 2.1 billion shares traded hands, and advancers outpaced decliners nearly 4 to 1.
Fed reacts
The Federal Reserve cut its overnight interest rate target by half a percentage point to 4.75%, citing turmoil in financial markets as a threat to economic growth. It also cut the discount rate by a half percentage point to 5.25%. .
"All but 23 economists were surprised," said Alan Skrainka, chief market strategist at Edward Jones of widely-held forecasts that the Fed would trim its overnight interest rate target just 25 basis points.
"The Fed finally recognizes what most of Wall Street has known for some time, that there is a greater risk of weakness in the economy than inflation," said Skrainka.
This is "very good news," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "The Fed has actually stepped up to the plate and took a solid swing at stemming" an economic slowdown, Pavlik said.
"The Fed wanted to take out a little insurance policy to make sure the economy doesn't deteriorate further," said Skrainka.
Wholesale relief
Ahead of the Fed's much-anticipated move, the Labor Department reported wholesale prices fell 1.4% in August, led by falling food and energy prices. However, the core producer-price index climbed a greater than expected 0.2%.
The producer-price index report, however, may not have had a great bearing on deliberations by the Fed, which focuses on consumer, rather than wholesale, prices. .
"The good news is top-line inflation has collapsed, although the core rate is higher than expected. Nevertheless it's good news, although I don't think the Fed is going to pay much attention," said Peter Cardillo, chief market economist at Avalon Partners.
While a rate cut offers a "psychological lift" to the market, a related rally is likely to be limited "because of the fact that a rate cut doesn't really solve the present problems," said Cardillo.
"The PPI report sets a comfortable tone for the start of today's FOMC [Federal Open Markets Committee] meeting," said analysts at Action Economics, who anticipated a quarter-percentage point cut in the Fed funds target rate, and a possible narrowing in the spread to the discount rate.
"The PPI [producer-price index] left the door open for the Fed," said Hogan.
Shares in motion
Wall Street firm Lehman helped lift the financial sector after its results topped expectations, with rivals Goldman Sachs Group and Bear Stearns Cos. slated to report their results later in the week. .
Retail shares also fared well, led by Best Buy Co. , after it reported an unexpected rise in second-quarter profit and raised its annual outlook.
Shares of Lehman Brothers climbed 5.9% after thinvestment bank reported a 3% decline in profit to $887 million, or $1.54 a share, on revenue of $4.31 billion. Analysts polled by Thomson Financial expected earnings of $1.47 a share on revenue of $4.3 billion.
Adobe Systems Inc. rose 1.2% after the design-software maker reported a 41% jump in quarterly revenue, better than forecast.
American Express Co. was up 2.6% after its agreement to sell its international banking unit in a deal worth about $1.1 billion. .
After leading the Dow's losses earlier on, General Motors Corp. was up 1.1%. Its stock was downgraded by Goldman Sachs, which shifted the automaker's shares to neutral from buy, saying likely union concessions are priced in.
Procter & Gamble Co. reiterated quarterly profit and sales forecasts.
In another reflection of the deteriorating housing market, the National Association of Home Builders reported builders' confidence at its lowest level. .
Other action
In electronic trade, gold futures for December delivery climbed as high as $733.30 an ounce shortly after the Fed's announcement. The contract had closed out the regular New York Mercantile Exchange session at $723.70, down 10 cents. .
Crude-oil futures for October delivery finished at $81.51 a barrel, up 94 cents to mark a fresh record close. .
The dollar fell against major currency rivals, hitting a new low against the euro, after the Fed's move. The euro was up slightly higher at $1.3957, compared to $1.3885 before the Fed's action. Shortly after the announcement, it rose to $1.3969, its highest level since it began trading in January 1999. .
Treasurys fell, with the benchmark 10-year note dropping 6/32 to 102 3/32, and its yield at 3.485%. .
The Nikkei 225 dropped 2% in Tokyo after a three-day break, while the FTSE 100 rose 0.8%, buoyed by banks after the British government pledged to guarantee the deposits held at troubled lender Northern Rock.
By Kate Gibson