Dow soars 331.62 as Fed holds rates steady, oil drops
NEW YORK — The stock market soared Tuesday as the Federal Reserve left interest rates unchanged and oil prices dropped.
The Dow Jones industrial average rose 331.62 points, or 2.94 percent, to 11,615.77.
The Standard & Poor’s 500 index added 35.87, or 2.87 percent, to 1,284.88.
The Nasdaq composite index rose 64.27, or 2.81 percent, to 2,349.83.
Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed to leave its key “federal funds” rate alone at 2 percent for the second straight meeting.
In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate also is used in setting rates on certain credit cards, home equity lines of credit and other lines.
In a statement accompanying its widely expected rate decision, the central bank reported that “economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports.” That assessment was welcome news to a market that has feared the economy was falling into recession because of weak consumer spending.
The Fed did have some darker news, stating that “inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities.” But it also said it expected inflation to moderate later in the year.
“The wording is a little strong over inflation, but there’s really no real change in policy,” said Brian Gendreau, investment strategist for ING Investment Management. “I think they are trying to buy time to allow the economy to recover, and so that the financials can slowly repair.”
Ryan Larson, senior equity trader at Voyageur Asset Management, said he believes the central bank will keep rates on hold until the early part of 2009. He said of Fed officials, “they seem more concerned about growth for the rest of this year, and I’d say right now they appear to be dovish for the short term.”
The oil market also helped soothe some of Wall Street’s worries — crude fell as low as $118 a barrel before settling at $119.17, down $2.24 on the New York Mercantile Exchange. Oil has now fallen $28 from its July 11 high of $147.27 on widening expectations that the slumping U. S. economy will keep curbing consumer demand for gasoline and other petroleum products.
“The market psychology has finally shifted,” said Stephen Schork, an analyst and trader in Villanova, Pa., adding that “$4- a-gallon gasoline has clearly killed demand.”
Stocks had plunged in June and early July as oil reached new heights; the fear on Wall Street was that higher prices for fuel would curtail consumer spending, which accounts for more than two-thirds of the economy.
With oil falling, and the Fed citing economic growth in its statement Tuesday, investors were allowing themselves to again feel a little more optimistic after a year of financial crises and soaring commodities costs that have pummeled stocks.
Treasury bond prices fell after the Fed released its decision. The yield on the benchmark 10- year Treasury note, which moves opposite its prices, rose to 4.02 percent from 3.97 percent late Monday.
The dollar traded mostly higher against other major currencies, while gold prices fell.
Early in the session, shares rose sharply after the Institute for Supply Management, the trade group of corporate purchasing executives, said its services sector index rose to 49.5 from 48.2 in June. Analysts surveyed by Thomson Financial/ IFR predicted it would rise to 49.0.
Any reading below 50 signals contraction. The report is based on a survey of the institute’s members and covers such indicators as new orders, employment, inventories, prices and exports and imports.
The notion that the sector might be in better shape than many investors feared gave Wall Street reason for optimism.
Earnings reports continued to stream in. Cisco Systems re-ported late Tuesday a 4.4 percent increase in net income for its latest quarter, beating analyst expectations by a penny per share. The world’s largest maker of computer networking gear said sales spiked almost 10 percent. Cisco closed up 66 cents, or 3 percent, at $22.65, then tacked on another 3 percent in after-hours trading.
Procter & Gamble Co., maker of Tide detergent and Gillette razors, said its fiscal fourth-quarter profit jumped 33 percent, boosted by price increases, overseas sales and tax benefits. Shares rose $2.09, or 3.2 percent, to $67.91.
Sony Corp. rose $1.37 to $38.39. The media conglomerate will buy Bertelsmann AG’s 50 percent stake in their Sony BMG joint venture for $1.2 billion, giving it full control of the music business.
Cablevision Systems gained $2.27 to $28.20. The diversified cable operator said it might spin off a division, buy back stock or pay a special dividend to boost its lagging share price.
Covidien Ltd. rose $2.35 to $52.25. The diversified health care company turned a profit in its third quarter, versus a year-ago loss, when it was part of conglomerate Tyco International.
Molson Coors Brewing Co. plunged $6.25 to $48.18. Second-quarter profit dropped 56 percent due to higher costs and charges associated with combining the beer brewer’s U. S. arm with SABMiller PLC.
Archer Daniels Midland Co. reported a 61 percent plunge in fourth-quarter profit, but said revenues soared amid higher prices for commodities like wheat and corn. The stock fell $1.53, or 6 percent, at $25.87.
D. R. Horton Inc., the nation’s largest home builder, posted a narrower fiscal third-quarter loss as charges to write down the value of property declined. Shares fell 5 cents to $11.17.
Advancing issues led decliners by a 3 to 1 ratio on the New York Stock Exchange, where consolidated volume came to 5.35 billion shares, up from 4.65 billion shares on Monday.
The Russell 2000 index of smaller companies rose 16.90, or 2.40 percent, at 721.04.
Overseas, Japan’s Nikkei stock average fell 0.15 percent. Britain’s FTSE 100 rose 2.52 percent, Germany’s DAX index rose 2.66 percent, and France’s CAC-40 rose 2.47 percent.
