Hope replaces fear

NEW YORK — The up-and-down stock market had a huge up day Tuesday, with the Dow Jones industrial average leaping more than 400 points even though the Federal Reserve cut its key interest rate less than many had expected.

The market was also pushed up by profit reports from Lehman Bros. Holdings and Goldman Sachs Group that convinced investors that no other Wall Street firms were facing the type of meltdown that felled Bear Stearns over the weekend.

“What we saw with Lehman and Goldman is that this bleak outlook is not really as bleak as people think,” said David Kotok, head of Cumberland Advisors in Vineland, N.J. “The expectation was slaughter, and instead you got positive reports from both firms.”

The Dow surged 420.41 points, or 3.5%, to 12,392.66. The Standard & Poor’s 500 index powered up 54.14 points, or 4.2%, to 1,330.74, and the Nasdaq composite advanced 91.25 points, or 4.2%, to 2,268.26.

The gains for key indexes were the biggest in at least five years, as winners swamped losers by 8 to 1 on the Big Board.

Early in the day, the Dow was up more than 200 points after the brokerages’ earnings reports were released, then pulled back after the Fed cut its benchmark rate by 0.75 of a percentage point, before surging powerfully throughout the last hour of the trading day.

Investors hesitated briefly on the news that two members of the Fed’s policymaking committee voted against the three-quarters-of-a-point rate cut, raising the question of whether there was internal disagreement about the central bank’s recent aggressive actions to stoke the economy.

“It gives a shadow of doubt about what the Fed’s intentions are going forward,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J.

Yields on Treasury bonds rose as investors who had sought safety put their toes back into stocks. The yield on the two-year T-note rose to 1.61% from 1.35% on Monday.

Financial stocks were the big winners. The S&P; financial index bounded 8.5% to its highest level since March 3. Lehman, whose stock had fallen sharply in the last two days on concerns that it was the investment bank most susceptible to Bear-like credit problems, jumped more than 43%.

Bear sold itself at a fire-sale price Sunday after skittish creditors refused to do business with the company.

Although profits fell at both Lehman and Goldman Sachs, investors were relieved that the results weren’t worse.

Lehman’s first-quarter earnings were down 57% and its revenue was off 31%, but both were higher than estimates. Its stock finished up $13.76 to $45.51.

“There was smoke flying around about Lehman being next, and I think that smoke has cleared the room,” said Keith Wirtz, chief investment officer at Fifth Third Asset Management in Cincinnati.

Goldman’s earnings fell by more than half as the firm recorded $2 billion in write-downs caused by losses in mortgage securities and other credit areas. Nevertheless, Goldman easily beat analysts’ estimates, and its stock rose $24.57, or 16.3%, to $175.59.

Other financial shares zoomed.

Bank of America advanced $2.97, or 8.3%, to $38.93. Citigroup rose $2.09, or 11.2%, to $20.71.

JPMorgan Chase rose for a second day after its deal to buy Bear, gaining $2.40, or 6%, to $42.71.

Bear Stearns shares spurted $1.10, or 22.9%, to $5.91, far above the $2-a-share buyout price, as some investors bet the deal wouldn’t go through at that price.

After a seesaw day Monday, investors also were expressing their approval of the steps the Fed has taken recently to thaw out the credit markets, including its decision to extend loans to investment banks just as it does to commercial banks.

“Most people think the things they’ve been doing the last two or three weeks have been very helpful,” said Alfred Kugel, investment strategist at Atlantic Trust in Chicago.

Still, stocks have staged many one-day rallies in recent months only to fall back again. Just a week ago, the Dow jumped almost 417 points in one session.

The surge Tuesday was powered in part by “short covering,” as traders who had bet on lower prices rushed in to close out their trades.

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walter.hamilton@latimes.com