Even before the Federal Reserve opens its checkbook to launch a new economic stimulus program, the central bank’s discussion of the idea is having some of the desired effects.
Stocks surged Wednesday to five-month highs, buoyed in part by the expectation that the Fed will keep the cost of money extraordinarily low to support economic growth.
With Fed policymakers focused intently on stoking hopes for a continuing recovery, every increase in share prices can help by boosting many Americans’ net worth.
Strong earnings reports from computer chip giant Intel Corp. and railroad company CSX Corp. also helped power a broad-based rally on Wall Street, driving the Dow Jones industrial average up 75.68 points, or 0.7%, to 11,096.08, its best finish since May 3.
The blue-chip index is up 10.8% just since Aug. 31.
The promise of cheap money is enriching investors in other markets as well: Stocks of many emerging-market countries have rocketed in the last month as U.S. shares have rebounded.
And as low U.S. interest rates make the dollar less attractive to global investors, the sliding greenback is fueling demand for gold and other commodities. Gold, a favorite investment of small investors this year, hit another record high Wednesday, surging $23.80 to $1,369.50 an ounce.
“The Fed is getting a lot of mileage out of just its discussion about doing more,” said John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C.
Minutes released Tuesday of the Fed’s Sept. 21 meeting confirm what many top central bank officials have telegraphed in speeches in recent weeks: They’re leaning toward pumping more money into the financial system if the economy fails to pick up speed soon.
The minutes indicate that the Fed’s focus will “primarily [be] on further purchases of longer-term Treasury securities” if policymakers move ahead with a new aid program.
Some economists believe the Fed soon will commit to buying as much as $1 trillion of Treasury bonds, adding to about $2 trillion in Treasuries and mortgage-backed bonds it already owns.
But the central bank already has accomplished a key goal of any new bond-buying program: Market interest rates on Treasuries have plunged since early August, when policymakers began to allude to the idea of ramping up bond purchases.
Falling Treasury yields have pulled down other long-term interest rates, including on mortgages and corporate bonds. The Mortgage Bankers Assn. said its index of refinancing activity jumped 21% last week as home loan rates hit record lows.
On Wednesday the yield on the benchmark 10-year Treasury note ended the day at 2.43%, up from 2.42% on Tuesday. Although the T-note yield has tumbled from 2.96% at the beginning of August, it has edged up from its recent low of 2.38% last week.
Some analysts say Treasury bond rates may not fall much more even if the Fed announces a new bond-buying program at its Nov. 3 meeting.
“A lot is baked into the market” with the declines of the last two months, said Gary Pollack, head of fixed income trading at Deutsche Bank’s private wealth management unit in New York.
But even if Treasury yields stall near current levels, the now-skimpy returns on bonds could help drive more investors into the stock market, some Wall Street pros say. That, in turn, could bolster business and consumer confidence.
“I think the stock market is as cheap as ever when compared with the bond market,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Yet many investors have shunned equities since the market’s spring sell-off best remembered for the infamous May 6 “flash crash.”
Individual investors in particular “have been scarce since the flash crash,” said Dave Rovelli, a veteran trader at brokerage Canaccord Genuity in New York. Instead, they have poured record sums into bonds.
Among institutional investors such as hedge funds, however, the reluctance to take a chance on stocks has been fading over the last month, as stock returns have trounced bond returns.
Trading volume on Wednesday was the heaviest in three months. Although the market pulled back somewhat from its highs of the day, most key indexes still finished at their highest levels since May.
The Standard & Poor’s 500 index gained 0.7%. The Nasdaq composite climbed 1%.
Although shares of Intel lost 53 cents, or 2.7%, to $19.24, the company’s upbeat third-quarter earnings report helped lift other tech issues and underpinned hopes that corporate results for the last three months will exceed analysts’ expectations.
Intel’s report pointed to the support that U.S.-based multinational companies’ earnings are getting from healthy economic growth in the developing world, even as the domestic economy struggles.
The chip maker said its 59% jump in net income from a year earlier was powered in part by higher sales in emerging markets, including China.
On Wednesday China reported a 25% rise in exports in September. That may further inflame trade tensions with the Obama administration, but it also helped boost global stock markets by suggesting that China’s economy remained robust.
The Mexican stock market hit a record high, with the IPC index surging 1.1%. Stocks jumped 2.4% in India, 2.1% in Germany and 1.5% in Australia.
As stocks continue to rally worldwide, some analysts warn that markets may have moved up too quickly, and could be vulnerable to a sharp pullback.
A weekly survey of investment newsletter writers by Investors Intelligence shows 47.2% now are bullish, up from just 29.4% in late August. Rising bullishness in that survey often is a “contrarian” indicator, meaning as optimism climbs the likelihood of a sell-off also increases.
Many experts also worry about the long-term effect of the Fed’s cheap-money policy as it devalues the dollar and raises the prospect of troubling inflation.
But in the near term, easy money makes “a melt-up scenario more likely than a meltdown scenario for stocks,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp.