Dow Stages 217-Point Rally
Stocks rocketed Thursday, giving some key indexes their biggest advance in years, as some investors again latched onto hopes that the Federal Reserve would soon end its credit-tightening campaign.
But technical trading also helped to stoke the rally, raising questions about its sustainability, some analysts said.
The Dow Jones industrial average soared 217.24 points, or 2%, to 11,190.80, as investors breathed a collective sigh of relief after the Fed raised its key interest rate a quarter point, to 5.25%, but also appeared to change its tone about the need for additional rate hikes.
Broader stock indexes fared better than the Dow. The technology-heavy Nasdaq composite jumped 62.54 points, or 3%, to 2,174.38. The Russell 2,000 small-stock index shot up nearly 4%.
For many major indexes the rally was the strongest since at least 2003, and they recouped a significant chunk of what they’ve lost since mid-May, when fears about interest rates sparked a sharp sell-off in stocks.
The blue-chip Standard & Poor’s 500 index, which surged 26.87 points, or 2.2%, to 1,272.87, now is down 4% from its five-year high reached May 5. It was down twice as much as of June 13.
In their post-meeting statement, Fed policymakers warned about inflation but also pointed to a “moderating” economy. They reiterated that their next rate move would depend on how the economy fared as well as what happened with inflation.
The Fed “softened the idea of an Aug. 8 rate hike,” said Jeffrey Kleintop, chief investment strategist at money management firm PNC Advisors in Philadelphia, referring to the central bank’s next meeting date.
Optimism about an end to rising interest rates had helped lift share prices in the first four months of this year. But in May comments by Fed officials indicated growing concern about inflation pressures, triggering a plunge in stock markets worldwide that deepened early this month.
Investors’ major fear: that the Fed and other central banks could bring on a global recession if they went too far in trying to slow the economy and restrain inflation via tighter credit.
Stock market optimists say the recent pullback in share prices was overdone. They expect the economy to continue growing, but at a slower pace that would allow the Fed to soon stop raising rates.
But some analysts questioned how much of Thursday’s rally reflected a newfound faith in the end of rising interest rates. A big reason for the day’s jump, they said, was simply that the market in recent weeks had become “oversold” -- Wall Street parlance for excessively negative investor sentiment.
When too many investors are bearish, the market often can shoot up on even a hint of good news. In part, that can occur because traders who have “shorted” the market -- borrowed shares and sold them, expecting a further decline in prices -- often rush in to close out their bets when a rally begins. Their purchases to replace loaned shares add fuel to any buying wave.
“The market had gotten too bearish. It was all a perfect setup for a squeeze” to the upside, said Michael Panzner, a trader at brokerage Collins Stewart in New York. He noted that the Dow had been up 80 points just before the Fed’s midday announcement.
Another factor Thursday, Panzner said, was quarter-end technical trading. In one such game, money managers buy more of the stocks they already own in an attempt to boost their values, so the portfolios appear stronger to clients in quarter-end financial reports. The second quarter ends today.
Peter Hooper, economist at Deutsche Bank Securities in New York, said that although the Fed “opened the possibility of a pause” in tightening credit, investors could be shocked in coming weeks by what he expected would be high readings on key inflation gauges.
One ominous sign for inflation: Crude oil futures in New York on Thursday rose for a seventh consecutive day, jumping $1.33 to $73.52 a barrel, the highest since May 2 and nearing the record of $75.17 set April 21.
Among the day’s highlights:
* Winners swamped losers by nearly 6 to 1 on the Big Board, but trading volume was surprisingly modest for such a big rally, some analysts said.
* Industrial stocks tied to the economy’s health led the gains. Many had led the sell-off in recent weeks. U.S. Steel jumped $2.21 to $69.85, United Technologies rose $1.96 to $63.29 and Deere surged $3.76 to $82.41.
Home builders also rallied. KB Home was up $1.92 to $46.92; Lennar rose $1.31 to $44.85.
* Brokerage stocks zoomed on optimism about the market’s outlook. Bear Stearns jumped $4.10 to $139.51 and Goldman Sachs gained $5.71 to $152.20.
* Treasury bond yields declined moderately. The 10-year T-note ended at 5.20%, down from a four-year high of 5.24% on Wednesday. The two-year T-note yield slid to 5.20% from 5.28%.
* The possibility of an end to interest rate increases hurt the dollar, which fell to 115.26 yen from 116.40 on Wednesday. Gold, which often gains when the dollar weakens, rose $7.50 to $586.50 an ounce in futures trading.
* Wall Street’s advance lifted many foreign markets. Mexican stocks soared 4.5% and the Canadian market rose 1.7%. European stocks also were broadly higher.
