Stocks Roar on Fed Cut, Profit News
A surprise interest rate cut and positive corporate earnings news sent stocks soaring Wednesday, vaulting the Nasdaq composite index to its fourth-biggest gain--and leading some on Wall Street to declare the bear market over.
Stocks already were rallying strongly, with Nasdaq up more than 100 points, when the Federal Reserve’s half-percentage-point rate cut was announced at 10:54 a.m. Eastern time.
The stunning news nearly doubled Nasdaq’s gain and lifted the Dow Jones industrial average more than 250 points in five minutes. Nasdaq eased a bit in late trading but still closed up 156.22 points, or 8.1%, at 2,079.44. The Dow gained 399.10 points, or 3.9%, to 10,615.83.
It was the busiest trading day in Nasdaq history, with 3.19 billion shares changing hands, and the second-busiest ever for the rival New York Stock Exchange.
All but five of the stocks in the Nasdaq-100 index--that market’s biggest names--posted gains, and winners outnumbered losers on the Big Board by more than 2 to 1.
The Fed’s action “increases the odds that this is the bottom” for stocks, after a yearlong bear market, said money manager James D. Awad, chairman of Awad & Associates in New York.
“This caught everyone by surprise. That’s when the Fed is most effective,” said Mario DeRose, chief bond strategist at Edward Jones in St. Louis.
Perhaps just as important, analysts noted that the market already had been rallying in recent weeks as more investors apparently began to view share prices at two-year lows as too attractive to pass up.
What’s more, in recent days a number of major tech companies have signaled that their businesses are steadying, raising hopes that the worst of the decline in corporate profits is behind the market, or soon will be.
Nasdaq last week staged its first four-day advance since summer, with hard-hit technology stocks managing to stabilize even as bad earnings news continued to rain down.
“The market has already turned the corner; the Fed is only bolstering it,” said Eugene E. Peroni Jr., director of equity research for John Nuveen & Co. in Radnor, Pa.
The central bank was worried that even if the aggregate economic numbers don’t point to a severe downturn, corporate profits have been shrinking so fast that firms are cutting back as if a recession already were in progress.
With its rate reduction, “the Fed is saying to [companies]: ‘Don’t be afraid to spend,’ ” Awad said.
The Fed’s rate cut was its fourth this year and left the central bank’s key short-term interest rate at 4.5%, 2 percentage points below the year-end level and the lowest since 1994.
And Wall Street still thinks there’s more to come: 24 of 25 major U.S. bond dealers surveyed by Reuters on Wednesday said they expect another rate cut at the Fed’s next scheduled meeting May 15.
The bullish view on Wall Street is that, even though the market has been deeply skeptical in recent months that Fed rate cuts would stave off recession, the central bank is increasingly demonstrating that it is serious about rejuvenating economic growth sooner than later.
Historically, the stock market has almost always rallied in the wake of deep Fed rate cuts, analysts note.
Other market pros point out that the current bear market, 1 year old last month as measured by the Standard & Poor’s 500 index and the Nasdaq composite, already is longer in duration than most significant market declines of the post-World War II era.
The glaring exception: The bear market of 1973-74, which lasted 21 months amid soaring oil prices, a surge in interest rates and the fall of President Nixon.
At some point in every bear market, selling exhausts itself and bargain hunters gain the upper hand. Whether that is the case now isn’t clear, but many analysts have been encouraged by the action in tech stocks.
Beaten-down tech stocks led Wednesday’s rally as investors rushed into many big names. Traders noted that key stocks had been rallying or holding up well in recent days--even in the face of more bad news.
Case in point: Cisco Systems, which disclosed after the close of trading Monday that its third-quarter sales would fall as much as 30% from the second quarter and that it would take one-time charges of $3.7 billion, partly due to write-offs of excess inventory.
It was grim news, yet the stock dropped only 54 cents in Nasdaq trading Tuesday to $16.66. Cisco came back with the rest of the market Wednesday, gaining $1.27, or 7.6%, to $17.93.
Meanwhile, companies with pleasant surprises were rewarded even more handsomely.
Computer chip maker Intel reported that first-quarter sales exceeded analysts’ reduced expectations and forecast that second-quarter sales also would top estimates as more orders flow in from personal computer firms.
Intel shares leaped $5.24, or 20.1%, to $31.28.
IBM, which gained $6.53, or 6.8%, to $106.23 on the Big Board, kept the momentum going in after-hours trading with a report after the market’s close that its first-quarter sales exceeded expectations.
Ned Riley, chief investment strategist at State Street Global Advisors in Boston, said IBM’s news might help launch a follow-up rally today. At worst, it could give pause to investors who have soured on technology and are looking to sell their shares into the next decent upswing.
Although Nasdaq has climbed a remarkable 27% since April 4, the tech-heavy index remains 16% below where it started the year and nearly 59% below its record high of 5,048.62, reached March 10, 2000.
The rally of the last two weeks now exceeds the January tech rally that lifted Nasdaq 24.8%.
With its own 3.9% gain Wednesday to 1,238.16, the broader Standard & Poor’s 500-stock index crept out of official bear-market territory, defined as a drop of 20% or more. The S&P; now stands 18.9% below its peak 13 months ago.
Subodh Kumar, U.S. investment strategist for CIBC World Markets in Toronto, said the Fed’s move would help investors “expand their time horizons away from just the next quarter” and get them focused on the potential for a turnaround in corporate profits six to nine months from now.
But Barton Biggs, chief global strategist for Morgan Stanley Dean Witter, told CNBC that Wednesday’s action represented “a classical bear-market rally,” and recommended selling into it.
Indeed, traders noted that some of Wednesday’s rebound was powered by “short” sellers covering their bets that stocks would head lower.
Biggs said there are three or four more quarters of bad earnings news ahead, which he argued will overwhelm even the most patient investors.
Among Wednesday’s highlights:
* Short-term Treasury security yields tumbled as traders rushed to lock in yields in the wake of the Fed cut. The three-month T-bill yield dived to 3.90% from 4.13% Tuesday. The two-year T-note slid to 4.23% from 4.40%.
But longer-term yields fell only modestly--suggesting rising expectations that the Fed’s rate cuts will work, revitalizing the economy and demand for money.
* European stock markets rallied sharply, catching the tail end of the Fed’s rate announcement. The German market soared 3.9%, while French shares gained 3.1%.
Among other markets, Canadian stocks leaped 4% and the Mexican market rose 1.2%.
Early today in Asia, the Hong Kong market was up 4.1% while Japan’s Nikkei index gained 2.2%.
* On Wall Street, leading stock groups Wednesday, besides tech, included bank, brokerage and home builders’ shares.
Many industrial names also rallied--a bet on a stronger economy thanks to the Fed. 3M surged $7.10 to $116, and Caterpillar gained $2.70 to $48.45.
* On the downside, investors took profits in many drug, food, energy and utility shares.
Market Roundup: C9-10
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Game Over for the Bear?
Wednesday’s surprise interest rate cut by the Federal Reserve sent stocks soaring, but the market had already been rallying in recent weeks after sinking to its lowest levels in more than two years. What’s more, some key technology companies have said in recent days that their business appears to be stabilizing-bolstering hopes for what has been the hardest-hit market sector.
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The Fed Juices Nasdaq’s Rally . . .
Monthly closes for the Nasdaq composite through March, and daily closes since then:
Wednesday: 2,079.44, up 156.22 points
*
. . . And Tech Leads a Broad Rebound . . .
Of 87 stock industry groups in the blue-chip Standard & Poor’s 500 index, 73 have risen over the last five trading sessions. The 10 biggest sector winners in that period:
*
Top 10 S&P-500; market sectors since April 11
Semiconductors: +27.0%
Electronic instruments: +24.9
Brokerages: +17.5
Entertainment: +17.3
Communications equip.: +16.6
Leisure: +10.6
Office equip./supplies: +10.6
Health care (misc.) : +9.9
Computer software: +9.9
Computer systems: +9.9
S&P; 500: +6.0
*
. . . Cutting Key Indexes’ Losses
The rally of the last few weeks has cut the Dow industrial average’s loss from its 2000 peak in half and has trimmed the S&P; 500’s drop from its peak to 18.9%-leaving it above the 20%-loss threshold of a bear market.
*
NYSE composite: -7.6%
Dow industrials: -9.4%
S&P; 500: -18.9%
Wilshire 5,000: -23.0%
Nasdaq composite: -58.8%
Sources: Bloomberg News, Times research
