Stock market surges on Fed’s credit-easing move

Stocks barreled higher Friday after the Federal Reserve did what Wall Street was clamoring for and eased credit, with the hint of more to come.

The Dow Jones industrial average rose as much as 322 points, then finished with an advance of 233.30, or 1.8%, at 13,079.08.

Broader market indexes scored bigger gains as investors poured in. Traders who had bet against stocks in recent weeks via “short sales” helped to stoke the rally by rushing to close out their bets, with the Fed now coming to markets’ aid.

The Standard & Poor’s 500 index jumped 34.67 points, or 2.5%, to 1,445.94.

The Russell 2,000 small-stock index gained 17.20 points, or 2.2%, to 786.03, pulling it almost back to even year to date.

The Nasdaq composite rose 53.96 points, or 2.2%, to 2,505.03.

Rising stocks outnumbered losers by nearly 7 to 1 on the New York Stock Exchange.

“People were kind of baiting the Fed into doing something, and finally they did,” said Philip Dow, a trader at RBC Dain Rauscher. “The playground monitor finally showed up, and it showed someone cares and someone is bringing rationality into the market.”

Stocks have been rocked in recent weeks by a severe tightening in the credit markets, as investors spooked by rising losses on mortgage-backed bonds have pulled back from financing other borrowers as well, including private-equity firms that need to borrow to complete corporate buyout deals.

The Fed, saying that “financial market conditions have deteriorated,” cut the loan rate it charges banks that borrow directly from the central bank. The rate was dropped to 5.75% from 6.25%.

The Fed didn’t reduce its benchmark rate, the federal funds rate, which it has held at 5.25% for 14 months. But many investors believe that policymakers will cut that rate as soon as their next scheduled meeting on Sept. 18.

Stocks had turned around late in Thursday’s session, when the Dow was off 344 points at its low for the day. It resurged to finish that session with a loss of just 15.69 points, as rumors of a rate cut flooded the market.

The Fed made the announcement before trading opened Friday, and share prices zoomed at the opening bell.

Financial-company stocks, hammered in recent weeks, led the rebound. Goldman Sachs rose $5.15 to $175, Bank of America gained $1.91 to $51.76 and Countrywide Financial soared $2.48 to $21.43.

European stock markets, which had plummeted Thursday amid a global retreat by investors, rose sharply at the tail end of their sessions Friday, after Wall Street opened with a bang.

The British market gained 3.5%, German stocks rose 1.5% and the French market rallied 1.9%.

Wall Street’s comeback also lifted Latin American markets. Mexico’s main stock gauge rose 2.6%. Brazil’s market gained 1.1%.

Analysts said the rebound in U.S. shares was helped by “short covering,” as traders who had previously borrowed stock and sold it -- betting that prices would drop -- bought shares to repay their loans.

Despite Friday’s gains, major indexes lost ground for the week. The Dow was off 1.2% for the five days; the Nasdaq index lost 1.6%.

But the rally sharply reduced the losses from the index’s summer highs. The Dow now is down 6.6% from its record reached July 19. The S&P; 500 is down 6.9% from its peak.

At their lows on Thursday, most major indexes were off more than 10% from their peaks, marking the first official “correction” in the bull market in more than four years.

Many experts cautioned against assuming that the market would quickly recoup all of its summer losses.

“Stocks are up decently, indicating some of the worst fears of a liquidity crisis are being alleviated,” said John Praveen, a strategist at Prudential International Investment Advisers in Newark, N.J. “But I don’t think this is the end. We’ll likely see some more bouts of fear and volatility in the coming weeks.”

Hugh Whelan, managing director at Hartford Investment Management, said that the Fed’s cut, “while helpful psychologically, didn’t really alter the stresses on the system” -- in particular, the problems of investors that have borrowed heavily to make market bets, and now are being forced to reduce their debts.

Among the day’s highlights

Oil prices rose amid a broad rebound in commodity prices, after investors had dumped many hard assets on Thursday. Near-term oil futures gained 98 cents to $71.98 a barrel. That boosted energy stocks, including Exxon Mobil, up $3.47 to $84.14, and Marathon Oil, up $3.19 to $53.44.

Other commodity-related stocks also were strong. BHP Billiton rose $2.53 to $54.80. Alcoa gained $1.37 to $33.29.

Defense issues snapped back. Boeing was up $3.19 to $95.93; Northrop Grumman rallied $2.19 to $77.72.

Long-term Treasury bond yields edged up as some investors sold bonds to buy stocks. The 10-year T-note yield ended at 4.68%, up from 4.66%.