Stocks Jump as Fed Raises View of Economy
August 12, 2009 - 5:11 PMA more upbeat Federal Reserve is reassuring investors that they've been making the right bets.
Stocks bounded higher Wednesday after the central bank ended a two-day meeting by saying the economy appears to be "leveling out" rather than shrinking at a slower rate. The Fed's more positive take on the economy than it had in June wasn't surprising but it still bolstered hopes for a recovery.
Wednesday's advance re-energized the market's summer rally after it had stalled on Monday and Tuesday. Major market indexes jumped more than 1 percent, including the Dow Jones industrial average, which rose 120 points. Long-term Treasurys fell after the Fed said it would slow its purchases of government debt.
Financial and technology shares posted some of the strongest gains after a ratings upgrade and profit reports provided evidence of a rebound. The stock market's advance was itself adding to bank and insurance stock gains - its climb means their investment portfolios are surging in value.
Investors who sent stocks soaring the past four weeks on expectations for a recovery went into Wednesday hoping for a change in the Fed's language. Many investors were anticipating that the central bank's assessment might be moving closer to their own after the Labor Department said Friday that the nation's unemployment rate fell in July for the first time in 15 months.
The Fed's statement was particularly gratifying after traders suffered an attack of nerves Tuesday that slashed 1 percent from the major indexes. Concerns about the health of banks fed that drop, but the Fed's comments soothed those fears. The central bank also left interest rates unchanged, as expected.
"They did really endorse the fact that we're moving into recovery, not searching for the bottom," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
The Fed also said it would slow the pace of its program to buy $300 billion worth of Treasury securities so that it will close at the end of October, rather than September as planned. The central bank has bought $253 billion of the securities so far. The program is designed to reduce rates on mortgages and other consumer debt.
"The fact that they are going to wind down the Treasury purchases I think leaves the clear impression that they are quite satisfied with the progress we are making in the recovery," McCain said.
But some analysts are skeptical that the market can maintain its climb even with the Fed's more optimistic words. The S&P 500 index is up 14.4 percent in little more than a month and 48.7 percent since it fell to a 12-year low in early March.
"It looks like a pretty sharp rise to me to have a lot of sustainability," said Dan Cook, senior market analyst at IG Markets in Chicago.
The Dow rose 120.16, or 1.3 percent, to 9,361.61. The Standard & Poor's 500 index rose 11.46, or 1.2 percent, to 1,005.81, while the Nasdaq composite index gained 28.99, or 1.5 percent, to 1,998.72.
Rising stocks outpaced those that fell 5-to-2 on the New York Stock Exchange, where consolidated volume fell to 5.5 billion shares from 5.8 billion Tuesday. Light volume can skew price moves but is typical of late summer when many traders take vacations.
Investors found encouragement Wednesday from a range of industries.
Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Ill., said quarterly results from luxury homebuilder Toll Brothers Inc. and retailer Macy's Inc. could be signaling that consumption is increasing. That is key to a recovery because consumer spending accounts for more than two-thirds of U.S. economic activity.
Homebuilders jumped after Toll Brothers said 3 percent more homebuyers signed contracts in its fiscal third quarter, the first annual increase in four years.
The company's statement that many of its markets are improving boosted confidence because analysts point to unemployment and housing as two of the biggest obstacles to a rebound. Toll jumped $2.94, or 14.4 percent, to $23.42.
Macy's reported a better-than-expected second-quarter profit and cited cost-cuts in raising its full-year earnings forecast. The retailer rose 93 cents, or 6 percent, to $16.40.
Insurers led financial stocks higher after S&P raised its credit outlook for Travelers Cos. The commercial and personal property insurer advanced $1.50, or 3.3 percent, to $46.43.
Tech shares rose after Applied Materials Inc.'s fiscal third-quarter results topped analysts' expectations. The maker of equipment for manufacturing semiconductors rose 44 cents, or 3.3 percent, to $13.66.
Meanwhile, bond prices were mixed after an auction of $23 billion in 10-year Treasury notes saw demand in line with recent levels but down from last month. The Treasury Department is issuing a record $75 billion in three auctions this week. The third, for $15 billion in 30-year bonds, is Thursday.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.72 percent from 3.67 percent late Tuesday. The yield on the 30-year bond jumped to 4.54 percent from 4.44 percent as stocks jumped and as investors feared the Fed's withdrawal from the market would hurt demand.
The dollar was mixed against other major currencies, while gold rose.
Benchmark crude rose 71 cents to settle at $70.16 a barrel on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies rose 10.05, or 1.8 percent, to 572.17.
Overseas, Britain's FTSE 100 rose 1 percent, Germany's DAX index added 1.2 percent, and France's CAC-40 jumped 1.5 percent. Japan's Nikkei stock average fell 1.4 percent.
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