Stocks Surge on Hope for Rate Plateau

Stocks roared back Tuesday, lifting major indexes to their biggest gains in a year, as investors cheered signs that the Federal Reserve’s campaign of raising interest rates finally might be almost over.

The Dow Jones industrial average zoomed 195 points, its best single-day jump since April 21, 2005. An early rally gained momentum after minutes of the most recent Fed meeting were released, indicating that most of the central bankers believed the end of their two-year credit-tightening cycle was “likely to be near.”

The Dow had dropped 63 points Monday as overseas political tensions and concerns about shrinking U.S. gasoline reserves sent oil futures to their highest levels since Hurricane Katrina stormed ashore last summer.

On Tuesday, all 30 Dow stocks advanced as investors shrugged off another record high for oil, with crude futures soaring above $71 a barrel.

In heavy trading, the broader Standard & Poor’s 500 index of blue-chip names and the technology-laced Nasdaq composite also notched their biggest gains in a year.

The Russell 2,000, a barometer of smaller stocks, scored its largest point gain in five years.

“The stock market was desperately looking for a sign that the Fed, under new Chairman Ben Bernanke, would finally bring an end to the rate hikes, and that’s exactly what it got,” said Alan Skrainka, chief market strategist at brokerage Edward Jones & Co. in St. Louis.

The Dow rocketed 194.99 points, or 1.8%, to 11,268.77. The S&P; 500 surged 22.32 points, or 1.7%, to 1,307.65. The Nasdaq catapulted 44.98 points, or 2%, to 2,356.14.

Winners swamped losers by more than 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq.

Surprisingly strong earnings from such companies as Johnson & Johnson and Merrill Lynch helped spark the early buying.

Adding to the positive mood was a report showing that “core” inflation, excluding volatile energy and food costs, stayed tame last month, easing fears that price pressures might prompt several more rate hikes.

The Fed then “gave an extra jolt to an already enthusiastic market,” said Jack Caffrey, strategist at JPMorgan Chase’s private bank in New York.

The Fed, which has lifted its target short-term interest rate to 4.75% from 1% through a series of 15 quarter-point increases starting in June 2004, is scheduled to meet next on May 10.

Economists expect an increase at that meeting, but say the Fed could pause when the target rate reaches 5% or 5.25%.

“Most members thought that the end of the tightening process was likely to be near,” according to the minutes of the March meeting, “and some expressed concerns about the dangers of tightening too much.”

U.S. Treasury yields fell as more traders joined the “one and done” camp -- betting that the central bankers would raise interest rates only once more.

The yield on the benchmark 10-year T-note slipped to 4.98%, from 5.01% on Monday.

The stock market rally came despite the jump in crude oil futures. Prices set a record for the second day in a row, rising 95 cents to $71.35 a barrel in New York trading.

The rise reflected investor concern that the U.S. might attack Iran to stop its nuclear development program or that insurgents might disrupt oil production in Nigeria.

“It is pure fear and nothing moves markets like fear,” said Tom Kloza, chief oil analyst for the Oil Price Information Service, which tracks energy markets.

The oil-price surge comes as U.S. oil inventories swell to levels not seen since 1998. But even ample oil inventories aren’t enough to calm worries that crude supplies will not be able to keep up with the globe’s energy appetite, analysts said.

“There is tremendous hype in the market,” said Fadel Gheit, senior energy analyst for Oppenheimer & Co. “This market has been driven by speculation. People are placing huge bets on events they believe will unfold in the not-too-distant future.”

As Gheit spoke Tuesday, he was watching the futures trading in progress and seeing numbers he said he never believed possible.

“As we speak, I am seeing history unfold before my eyes. December oil is trading at $74.95. January is $75.10. There is no real shock anywhere in the world that explains this, but I am watching it in awe.”

Wall Street strategists, however, said jitters over oil prices were overshadowed by the encouraging signals sent by the Fed. They noted that in today’s service-oriented economy, high oil costs have less of an impact on consumer and business spending than they did in the 1970s, when Middle East unrest sparked gasoline shortages and price spikes.

“People will continue to fill up their tanks,” Skrainka said. “It’s a little more painful, but it’s not going to stop people from spending money.”

Still, he said, if a “sustained rise” were to lift oil to an inflation-adjusted record of around $90 a barrel, that could alarm the Fed and spell trouble for the stock market.

On the economic front, the Labor Department reported that wholesale prices rose 0.5% in March after a 1.4% decline in February. The increase in the producer price index, which measures inflation pressures before they hit the consumer, was the largest since a 0.8% rise in December.

However, core inflation, one of the figures closely watched by Fed policymakers, climbed 0.1%, less than expected.

In other trading, gold climbed to $620 an ounce, the highest since 1980, from $615.40 on Monday as record oil prices and a decline in the U.S. dollar spurred some investors to buy the metal as an inflation hedge.

On currency markets, the dollar fetched 117.29 Japanese yen, down from 117.76, while the euro ascended to $1.231 from $1.226.

In other market highlights:

* The Dow got boosts from Alcoa, which added $1.16 to $35.16; Caterpillar, which climbed $2.46 to $78.91; and Hewlett-Packard, up $1.45 to $33.48.

* Solid earnings reports lifted Merrill Lynch, which gained 92 cents to $79.38, and Johnson & Johnson, which advanced 48 cents to $58.13.

* UnitedHealth Group slipped $2 to $49.67 after posting better-than-expected quarterly earnings but guiding down expectations for next year.

* Oil stocks rose, including Exxon Mobil, which gained $1.49 to $63.54, and Chevron, which tacked on $1.55 to $60.87.

* Among tech names, Travelzoo soared $8.62 to $28.60 after handily beating profit targets, and Micron Technology jumped 91 cents to $16.03 on an analyst upgrade.