Inflation Report Triggers Market Rally
Wall Street kicked the summertime blues with a strong rally Tuesday, triggered by a surprising dip in “core” wholesale prices.
But a report due out today on consumer prices could help determine the stock market’s strength in the days ahead.
Stocks surged after the Labor Department reported that wholesale prices rose a slight 0.1% last month.
Excluding food and energy costs, prices dropped 0.3% -- the first decline in the so-called core rate since October.
Both numbers were below analysts’ expectations.
The report gave investors confidence that the Federal Reserve would be content to leave short-term interest rates unchanged when it meets next month, said Hugh Johnson, investment strategist at First Albany Corp. in New York.
At its meeting last week, the Fed left its key rate alone after 17 consecutive increases since mid-2004.
The Dow Jones industrial average soared 132.39 points, or 1.2%, to 11,230.26. The Dow’s gain was its biggest since it climbed 182.67 points, or 1.7%, on July 24.
The technology-heavy Nasdaq composite index performed even better, gaining 45.97 points, or 2.2%, to 2,115.01, its best advance since a 3% climb in late June. The Standard & Poor’s 500 index of blue-chip companies rose 17.37 points, or 1.4%, to 1,285.58.
Smaller stocks, which have struggled in recent weeks, posted hefty gains. The Russell 2,000 small-stock index jumped 2.4%, twice the Dow’s advance.
“The inflation news was very positive, and it suggested that the Federal Reserve was right -- that the economy was slowing and we might be in a sweet spot where the economy is growing at a sustainable pace, while inflation is low,” Johnson said. “That’s the best of all possible worlds for investors.”
“But you have to realize that the market has reached that conclusion for one day,” he added. “We have the consumer price index coming out [today] and that could change the mood on Wall Street on a dime.”
There is a chance, for example, that the moderation in wholesale prices hasn’t yet filtered down to the retail level. If consumer prices don’t parallel the wholesale numbers, Wall Street’s sunny mood could turn dark again.
“We are at a potential inflection point for the economy, and everyone is trying to filter each incremental piece of news,” said Duncan Richardson, chief investment strategist at Eaton Vance Corp. in Boston. “That’s likely to create a push-me/pull-you scenario for a while.”
In addition to the wholesale price data, investors were cheered by a further decline in oil prices, with a barrel of crude sliding 48 cents to a four-week low of $73.05 in New York futures trading.
Winners topped losers by 5 to 1 on the New York Stock Exchange and by 3 to 1 on Nasdaq, strong indications of buyer interest. But modest trading volume, typical of mid-August, dimmed some analysts’ enthusiasm about the rally.
And while the advance helped the major indexes regain some of the ground they have lost since spring, the Dow still is more than 400 points below its May 10 close of 11,642.65. The Nasdaq remains in negative territory for the year, down 4.1% since Jan. 1.
Among the day’s market highlights:
* U.S. Treasury yields fell on the prospect of steady short-term interest rates. The benchmark 10-year T-note slid to 4.93% from 5% on Monday. Treasury yields fall as their prices rise.
* Sectors sensitive to interest rate changes helped fuel Tuesday’s advance. Among mortgage lenders, Countrywide Financial surged $1.01 to $34.08 and IndyMac Bancorp gained 87 cents to $41.63.
Home builders also rallied. KB Home jumped $1.59 to $41.84 and Pulte Homes was up 80 cents to $28.33.
* Among technology companies, Intel added 26 cents to $18.13 and Irvine-based Broadcom shot up $1.80 to $27.91. Qualcomm gained 5.5%, rising $1.86 to $35.45. Lower interest rates could help buoy tech sales.
* Dell shares soared 4%, or 84 cents, to $22.08, despite its recall of notebook computers for battery problems. The company said that it didn’t expect its business to be affected by the recall.
* Tribune, the Chicago-based media company that owns the Los Angeles Times, jumped $1.46 to $31.24. A hedge fund run by Nelson Peltz disclosed after the bell Monday that it had taken a 1.2% stake in the company. Analysts say Peltz may push for changes that could raise Tribune’s share price.
* Energy stocks were mixed on lower oil prices. Exxon Mobil retreated 56 cents to $68.69 and Chevron dipped 19 cents to $66.86, but Marathon Oil gained $1.52 to $87.85.
