Stocks surge after Fed cut
Stocks surged after the Federal Reserve’s interest rate cut Tuesday as investors viewed the half-point reduction as strong medicine that would avert a recession.
The Dow Jones industrial average shot up 335.97 points, or 2.5%, to 13,739.39, its biggest one-day rally since April 2003.
Among broader indexes, the Standard and Poor’s 500 soared 43.13 points, or 2.9%, to 1,519.78. The Nasdaq composite index jumped 70 points, or 2.7%, to 2,651.66.
Beaten-down financial-services and housing stocks led the advance.
Also rallying sharply: shares of commodity producers, apparently on hopes that the global economic expansion will roll on, supporting a continuing bull market in oil, gold and other commodities.
Advancing stocks outnumbered decliners by a whopping 9 to 1 on the New York Stock Exchange and by more than 3 to 1 on Nasdaq. Trading was heavy.
Smaller stocks outpaced larger issues as the Russell 2,000 small-stock index leaped 4%.
“This was clearly a big day for the stock market,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “This signals preliminarily that there will be no recession and that the bull market will resume.”
The Dow index is now up 10.2% for the year and stands about 1.9% below its record close of 14,000.41, reached in mid-July.
Nevertheless, there were clear signs that some investors were worried that the Fed’s rate cut could set off inflationary pressures if the economy isn’t as weak as many investors believed.
Long-term Treasury bond yields climbed, with the yield on the 30-year Treasury bumping up to 4.76% from 4.70% on Monday. The yield on the 10-year T-note, which influences mortgage rates, inched up to 4.47% from 4.46%.
Gold, historically a refuge in times of rising inflation, reached a 27-year high.
Gold futures for December delivery jumped in after-hours trading as high as $735.50 an ounce -- the highest price for the metal’s most-active contract since February 1980. The gold contract for October delivery, which fell 10 cents to $717 an ounce in regular trading, went as high as $727.40 after hours.
Oil closed at a record high $81.51 a barrel, up 94 cents, while the dollar fell to a record low against the euro and also dived against other currencies.
Some observers doubt that the stock market’s rebound has staying power, arguing that lower interest rates aren’t going to automatically cure the housing crisis and credit crunch linked to the meltdown in the sub-prime mortgage market.
“I have a feeling the rally’s over,” said Michael Metz, chief investment strategist at Oppenheimer in New York. The rate cut is “a short-term Band-Aid but doesn’t solve the problem.”
Some of the buying demand appeared to come from investors who, anticipating only a quarter-point rate cut, had bet that stocks would fall Tuesday and had to reverse those bets when the market rallied, he said.
Even so, many market watchers were impressed by the breadth of the rally.
The market has often continued to rally after such strong days, said John Bollinger of Bollinger Capital Management.
“Stock prices really want to go higher here,” Bollinger said.
Stocks rose in the morning in part because brokerage Lehman Bros. reported better-than-expected third-quarter earnings. That allayed some fears about the effect that the financial-market turmoil is wreaking on the premier investment banks.
The Dow was up about 75 points when the Fed made its announcement at 11:15 PDT. The market immediately rocketed on the news, and mostly continued to climb right to the closing bell.
Among the day’s market highlights:
Lehman paced a broad advance in bank and brokerage stocks. Lehman shares jumped $5.87, or 10%, to $64.49. Goldman Sachs Group bounded $12.89, or 6.9%, to $200.50. Morgan Stanley rose $3.60, or 5.6%, to $68.51.
Home builders soared on expectations that lower interest rates would stimulate demand and might help financially strapped homeowners refinance their mortgages and avoid foreclosures. Hovnanian Enterprises zoomed $3.22, or 28%, to $14.55. Standard Pacific barreled ahead $1.25, or 15%, to $9.48 and KB Home gained $1.05, or 3.7%, to $29.17.
In the commodity sector, Aluminum China rose $4.28 to $64.22, Southern Copper jumped $5.37 to $114.53 and U.S. Steel gained $6.56 to $97.75.
Retail stocks got a lift after Best Buy reported better-than-expected quarterly earnings. Best Buy rallied $2.92 to $47.46, J.C. Penney advanced $4.70 to $68.05 and Target added $3.87 to $67.28.
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Rate reduction’s effects, at a glance
How financial markets reacted to the Federal Reserve’s half-point interest rate cut Tuesday:
U.S. stocks: Many on Wall Street had expected the Fed to reduce its key rate by a quarter of a point, to 5%. Instead policymakers dropped the rate to 4.75%. Investors viewed that as a sign the Fed would be aggressive in trying to keep the economy from falling into a recession that could devastate corporate earnings.
The result was a buying wave that pushed many stock market indexes to within striking distance of their mid-summer highs. The Dow Jones industrial average jumped 335.97 points, or 2.5%, to 13,739.39, leaving it less than 2% below its record high of 14,000.41 reached July 19. The Nasdaq composite, which rose 2.7% to 2,651.66, is within 2.6% of its 2007 high, also set July 19.
Foreign stocks: What’s good for the U.S. economy should be good for Latin America -- or so many investors reasoned. Brazil’s main market index soared 4.3%. Stocks jumped 2.7% in Mexico. Early today in Asia buyers also were swarming. Japan’s Nikkei-225 index was up 3.2%, the Australian market rose 2.4% and Hong Kong shares jumped 3.4%.
U.S. Treasury securities: Short-term T-bill yields slid after the Fed’s announcement, as many traders bet the Fed wasn’t through cutting rates. The six-month T-bill yield dropped to 4.08% from 4.29% on Monday. A Reuters poll of 18 major bond dealers Tuesday showed that two-thirds expected the Fed to reduce its key rate again when policymakers meet Oct. 31.
But long-term T-bond yields edged up, with the 10-year T-note ending at 4.47%, up from 4.46% on Monday. Some analysts said that was a sign that bond investors feared the Fed was willing to tolerate higher inflation to keep the economy growing. Inflation is public enemy No. 1 to bond investors because it erodes fixed returns.
Junk bonds: The yield on an index of 100 junk issues tracked by KDP Investment Advisors fell to 8.14% on Tuesday from 8.22% on Monday, and now is the lowest since July 20. That could make it easier for private equity firms that are trying to borrow to finance corporate buyouts announced before the credit crunch and global market turmoil that struck in mid-summer.
The dollar: The U.S. currency was the day’s big loser, because lower U.S. interest rates could make dollar-denominated debt less attractive to foreign investors. The euro jumped to a record high of $1.397 from $1.387 on Monday. The Canadian dollar hit a 30-year high of 98.4 cents, up from 97.3 cents. As the dollar sank, gold gained as an alternative. Gold futures eased in regular trading, then shot up after hours. Gold futures for December rose above $730 an ounce -- the highest since 1980. The contract had closed at $723.70.
-- Tom Petruno
