Wall St. Embraces Fed Notice
The stock market liked what it heard from the Federal Reserve on Wednesday: The central bank’s midday announcement that “the outlook for economic recovery has become promising” helped send stocks into positive territory after morning losses.
Trading was heavy as buyers poured into the market in the afternoon.
By the market’s close, key indexes had recouped 40% to 55% of Tuesday’s sharp decline, when worries about new accounting controversies drove the blue-chip Standard & Poor’s 500 index to its worst loss since Sept. 20.
The S&P; rose 12.93 points, or 1.2%, to 1,113.57 Wednesday, after diving 2.9% Tuesday. The Dow industrials rose 144.62 points, or 1.5%, to 9,762.86, after losing 247.51 points Tuesday.
The Nasdaq composite index gained 20.45 points, or 1.1%, to 1,913.44.
The Dow had been down 90 points at its low Wednesday morning, amid continued selling tied to worries that Enron-like accounting scandals may engulf many more U.S. companies. Financial stocks also were hard hit on concerns about possible losses from a new round of corporate bankruptcies.
But share prices already were in a rebound when the Fed announced about 11:15 PST that it would keep its key short-term interest rate at the current 40-year low of 1.75%--opting against another rate cut--because of more signs that “economic activity is beginning to firm.”
The Fed’s statement helped propel the market in the final 90 minutes of trading. Winners topped losers by 3 to 2 on the New York Stock Exchange and by 19 to 16 on Nasdaq.
“The Fed clearly believes we are on the cusp of a recovery,” said Stuart Freeman, chief equity strategist at brokerage A.G. Edwards in St. Louis. Though short-term interest rates may not fall further, the benefits of the 11 cuts made in 2001 should continue to filter into the economy and the stock market this year, he said.
Still, investors have yet to see improvement in corporate earnings overall: Fourth-quarter profit reports have generally been dismal. And the market on Tuesday signaled its growing concern that corporate financial data can’t entirely be trusted, in the wake of Enron’s collapse and accounting controversies at other companies, including banking firm PNC Financial, energy firm Williams and oil and gas exploration firm Anadarko Petroleum.
Some traders said Wednesday’s rally stemmed in part from “short covering” by bearish investors who had previously borrowed stock and sold it, betting on lower prices. When the rally gained steam Wednesday, some of those short-sellers opted to buy back stocks to close out their bets, traders said.
Others said the market’s strength reflected the Fed’s soothing language: Though the central bank predicted recovery, it also said it sees significant risk that the economy could weaken again. That language indicates that the Fed is ready to cut rates further if need be, analysts said.
In the bond market, long-term Treasury bond yields rose as the Fed halted its rate-cutting campaign, at least for now. But the increases were relatively modest. The 10-year T-note yield rose to 5.01% from 4.94% Tuesday.
Longer-term yields are slightly below where they started the year, suggesting that even if the Fed has stopped cutting short-term rates, investors don’t believe the central bank will begin raising rates soon.
Indeed, that is the prevalent view among economists. Ken Goldstein, economist at the Conference Board in New York, said the Fed may not raise rates before late summer, even if the economy continues to gain strength.
That would keep rates on money-market mutual funds and other short-term accounts near current record-low levels. The average money-market fund yield is 1.46%, Imoneynet.com reported.
But whether low yields will encourage more investors to shift funds to the stock market remains to be seen.
On Wednesday, however, the bulls were in control again on Wall Street. Retail stocks led the market higher, as investors bet that retailers will be major beneficiaries if the economy is rebounding.
Wal-Mart rose $1.84 to $59.75, Home Depot jumped $2.07 to $49.07, and Target gained $1.91 to $43.76.
Many technology stocks also rebounded. Intel added $1.18 to $33.86, Apple Computer rose $1.02 to $24.09 and IBM gained $2.55 to $105.55.
But some major telecom stocks continued to be weighed down in the wake of fiber-optic-network operator Global Crossing’s bankruptcy filing this week. WorldCom Group slumped 55 cents to $9.85, the lowest closing price since 1995. Qwest Communications fell $1.01 to $10.75.
Drug maker Elan tumbled $5.95 to $29.25 after a published report questioned the company’s accounting methods.
But conglomerate Tyco, long rumored to use aggressive accounting, rose $1.20 to $34.85 after plunging for much of this month. Tyco’s two top executives said they will buy a total of 1 million shares to show their faith in the company.
