Stocks End Session Mixed After Surprise
Stock and bond markets stumbled to a mixed finish Tuesday, as the Federal Reserve raised its key interest rate as expected, but surprised investors by revising its meeting statement with a few minutes left in the trading session.
The benchmark Dow Jones industrial average changed direction eight times Tuesday, although all within a narrow range. It ended up 5.25 points at 10,256.95.
Investors weren’t surprised by the Fed’s initial statement after its meeting, which retained the pledge to keep raising rates at a “measured” pace.
But with about five minutes to go in the trading session, the central bank stunned Wall Street by saying it had mistakenly omitted a sentence from its official statement: “Longer-term inflation expectations remain well contained.” That sentence had been included in previous recent Fed meeting statements.
The reinstatement of that line fueled a sudden buying wave in stocks and bonds because it suggested to some investors that the Fed wanted to calm concerns that the recent uptick in inflation might accelerate, analysts said. A sustained rise in inflation could force policymakers to raise interest rates more aggressively.
“The market was worried about inflation and how the Fed would react to it,” said Joseph Williams, who helps manage $10 billion at Commerce Trust in Kansas City, Mo. Investors “are relieved that the Fed is not spooked by the increase in the inflation rate.”
The Dow’s net gain for the day was a reversal from a loss of about 44 points just before the Fed’s revised statement.
Other major indexes also reversed course near the end of trading, but not all ended in positive territory. The Nasdaq composite gained 4.42 points, or 0.2%, to 1,933.07, but the Standard & Poor’s 500 eased 0.99 point, or 0.1%, to 1,161.17.
Five stocks declined for every four that advanced on the New York Stock Exchange.
In the bond market, the yield on the 10-year Treasury note edged up to 4.20% after the Fed’s initial statement, from 4.19% Monday, then eased to 4.17% after the central bank revised the statement.
With traders focused on the Fed, another decline in oil prices didn’t have much effect on activity, analysts said. Near-term crude futures in New York lost $1.42 to $49.50 a barrel.
It was the lowest close since mid-February, and came amid anticipation that government data this week would show a continuing rise in oil inventories.
Investors now will turn their attention to the week’s next major event -- Friday’s U.S. April employment report.
“Right now, the market has stabilized, but until we get some more data on how much the economy is going to slow, how much earnings are going to slow, I don’t think you can make any stronger statement than that,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “It’s clear the economy is slowing, but investors want to know how much and how far.”
In other market highlights:
* A gauge of energy shares fell 2.3% for the steepest drop among the S&P; 500’s 24 industry groups. Exxon Mobil lost $1.24 to $56.50. Valero Energy, the S&P; 500’s best performer this year, declined $2.73 to $65.80.
* Shares of Boeing and Lockheed Martin rose after they announced a joint venture to produce rockets for the U.S. military, ending a bitter rivalry and setting the stage for the defense contractors to drop pending litigation involving the rocket business. Boeing was up 49 cents at $59.87; Lockheed added 55 cents to $62.41.
* The drop in oil prices may have helped some retail stocks by raising optimism that fuel costs will abate, giving consumers more spending power. Staples, the world’s largest office-supplies retailer, climbed 72 cents to $19.88. Sears Holdings, created after Kmart Holding purchased Sears, rallied $3.88 to $139.30.
* Auto stocks, down sharply this year, rose modestly despite some gloomy April sales news. GM added 61 cents to $27.77. The company said U.S. sales of cars and trucks fell 3.9% in April from a year earlier. GM shares have slumped 31% this year for the steepest drop in the Dow average. Ford rose 25 cents to $9.47. The company said U.S. sales of cars and trucks fell 1.5% in April.
* Tyco International dropped $2.07 to $28.65 in heavy trading after the conglomerate said second-quarter profit dropped 75% on a number of one-time charges. Tyco beat Wall Street’s profit expectations by a penny a share, but investors were disappointed with a lower-than-expected forecast for coming quarters.
* MBIA rose $3.23 to $56.43. The bond insurer that restated seven years of results in March said first-quarter profit excluding gains and losses on investments and derivatives was $1.40, exceeding a $1.34 average estimate of analysts polled by Thomson First Call.
* William Lyon Homes continued to climb, adding 42 cents to $89.05. Its founder last week offered to buy the Newport Beach-based company for $82 a share, but the stock’s reaction indicates the market expects a higher bid.
