Fed’s Warning Quells Post-Election Rally
Investors reawakened to the possibility of higher interest rates Wednesday after the Federal Reserve warned that inflation remains a risk to the economy. The Fed’s assessment wiped out a solid advance on Wall Street, with investors fearing higher rates that would further erode corporate earnings.
The major indexes all managed moderate gains. But the Fed’s warning, and accompanying decision to leave interest rates untouched, diminished the stock market’s first post-election rally, which had begun Tuesday.
The Dow Jones industrial average fell from a gain of 115 points into negative territory, but recovered to close up 26.54 points, or 0.3%, at 10,707.60.
Broader indicators followed the same path as the Dow. The tech-focused Nasdaq composite index ended the session up 27.22 points, or 0.9%, at 3,165.49 and the Standard & Poor’s 500 index was up 7.09 points, or 0.5%, at 1,390.04. Bonds rallied, with the yield on the 10-year Treasury note falling to 5.71% from Wednesday’s close of 5.75%.
The Fed said rising energy prices still pose an inflation risk for the coming months. Its decision gives investors, who since last month have endured a string of poor earnings reports, new reason to fear falling profits.
The announcement took Wall Street by surprise. Earlier Wednesday, investors put aside some of their worries about earnings and the presidential election and bid stocks higher.
Interest rates preoccupied the market for much of this year, setting off periodic bouts of selling, until it became clear in August that the economy was slowing. The Fed has raised rates six times since June 1999.
Throughout Wednesday’s session, the market had been working hard to feed on gains from Tuesday, when the Dow and Nasdaq each surged more than 160 points. The rally was created in part by bargain hunting and a series of upbeat earnings reports from retailers.
“There is a lot of uncertainty out there,” said Chris Dickerson, market analyst for Global Market Strategists. “How much is the economy slowing? What is going on with earnings and the presidential election?”
Big technology names held their gains despite the Fed’s announcement. Intel rose 56 cents to close at $41.50. Microsoft picked up $1.25, finishing at $70.06.
Despite the market’s performance Wednesday, and the recent high-tech sell-off, analysts said there is still overall strength in blue chips.
“The techs are pulling down averages along the way . . . but prices on the New York Stock Exchange have held up quite well,” said Steven Goldman, market strategist for Weeden & Co., also noting that despite recent losses, the Dow is about 700 points above its October low when it dipped below 10,000.
Among blue chips, retailers gained, continuing their advance on strong earnings reports Tuesday. Wal-Mart soared $2.13, closing at $49. Home Depot rose 44 cents to $39.63.
Pharmaceutical stocks, often considered wise buys in an uncertain or bearish market, were mixed. Drug maker Glaxo Wellcome finished down 50 cents at $58.56 after announcing that its new treatment for the AIDS virus was approved by the Food and Drug Administration. Dow component Merck advanced 56 cents to $91.63.
Advancing issues outnumbered decliners in a 7-to-5 ratio on the New York Stock Exchange where trading was heavy.
