Stocks boosted by rate cut
The stock market bounded higher Wednesday after the Federal Reserve lowered interest rates and said risks to the financial markets from the summer’s credit crisis had eased. The Dow Jones industrial average gained more than 130 points on the day.
Stocks zigzagged in the minutes after the Fed’s decision because the central bank’s statement suggested further rate reductions weren’t likely. Investors, however, subsequently appeared relieved that the Fed’s comments signaled the central bank considered the situation in the credit markets less dire than when it met last month.
Investors, businesses and consumers will be getting cheaper access to cash because of the Fed’s quarter-point rate cut, and that probably gave stocks a boost. The Fed funds rate now stands at 4.5%. Last month, the Fed delivered a larger-than-expected half-point cut.
“A rather stingy Fed suggests that they see an economy that is in pretty good shape,” said Bruce McCain, head of the investment strategy team for Key Private Bank. “They’re saying now we can turn back to the issue of inflation and implicit in that is that the economy is getting back on track.”
The Dow, which dipped briefly into negative territory after the decision, closed up 137.54 points, or 1%, to 13,930.01.
The Standard & Poor’s 500 index rose 18.36 points, or 1.2%, to 1,549.38, and the Nasdaq composite index rose 42.41 points, or 1.5%, to 2,859.12.
The Russell 2,000 index of smaller companies rose 11.87 points, or 1.5%, to 828.02.
Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange.
Long-term Treasury yields rose after the Fed’s decision. The yield on the 10-year Treasury note climbed to 4.47% from 4.38% late Tuesday.
The dollar took another hit as the Fed cut rates. The euro rose to a record high of $1.45, up from $1.443 on Tuesday. The U.S. dollar’s value fell to 94.6 Canadian cents, down from 95.3 cents on Tuesday and the lowest since the late 1800s, according to Reuters.
Gold rallied as the dollar slumped. Near-term gold futures in New York rose $7.70 to $792 an ounce, a 27-year high.
Oil prices soared further into record territory after the government reported an unexpected drop in inventories of crude for the second week in a row. Oil futures rose $4.15 to $94.53 on the New York Mercantile Exchange, marking a rise of $10 in a week.
In a statement, the central bank said recent hikes in energy and commodity prices were among the forces that could be adding to inflation pressures and that “the upside risks to inflation roughly balance the downside risks to growth.”
The Fed appeared more upbeat about the health of the economy than it did last month when it said strains in the credit markets threatened to further pinch the housing market and the economy at large.
Quincy Krosby, chief investment strategist at the Hartford, said that after giving investors the quarter-point cut most had been expecting, prudence demanded that the Fed offer a somewhat cautious statement and address inflation concerns.
“The market understood that you cannot have oil prices hitting almost $95 a barrel,” Krosby said. “You have to acknowledge commodity prices.”
Wednesday’s rate cut came after the Commerce Department said the country’s economy grew at an annual rate of 3.9% in the third quarter, faster than the 3% growth economists had forecast on average.
As investors digested economic data and the Fed’s statement, more companies reported results for the latest quarter.
Auto-parts maker Visteon narrowed its loss in the third quarter as cost-cutting partly offset lower revenue. Visteon rose 49 cents, or 8.4%, to $6.35.
McKesson jumped $7.55, or 12.9%, to $66.10 after the distributor of prescription drugs turned in better-than-expected quarterly results and raised its full-year forecast.
In other market highlights:
* Energy-related stocks zoomed as oil surged. ConocoPhillips jumped $2.24 to $84.96, Transocean gained $4.50 to $119.37 and Suncor Energy climbed $4.66 to $109.23.
* Gold mining issues rallied with gold. Barrick Gold shot up $1.74 to $44.13. Newmont Mining, which reported better-than-expected quarterly earnings, rose $4.46 to $50.90.
* Shares of many home builders and mortgage lenders fell after the Fed’s announcement on concern that Wednesday’s rate cut may be the last for a while.
KB Home slumped 76 cents to $27.64, Centex lost $1.36 to $25.06, IndyMac Bancorp slid $1.24 to $13.42 and Countrywide Financial sank 42 cents to $15.52.
* Santa Monica-based lender Fremont General plunged 29 cents, or 9.5%, to $2.77 after the firm said late Tuesday that it called off talks with an investment group led by billionaire Gerald J. Ford. On Wednesday the company said it hoped to announce a new management team in about one week.
* MasterCard rocketed $32.76, or 20.9%, to a record $189.91 after the credit-card processor said earnings rose 63%, helped by card use outside the U.S.
* Google crossed $700 for the first time, climbing $12.23 to $707 on optimism that the Web giant can still boost profit while pushing into new markets. The stock took less than a month to go from $600 to $700.
* European markets closed higher before the Fed’s decision. Key stock indexes climbed 0.9% in Britain, 0.5% in Germany and 0.8% in France.
Elsewhere overseas, shares rose 0.5% in Japan and fell 0.9% in Hong Kong.
