NEW YORK (CNNfn) - U.S. stocks surged for the fourth straight session Tuesday as investors bet the Federal Reserve's latest interest rate hike brings its cycle of credit tightening closer to an end.|
The Nasdaq composite index was lifted by Lycos and other technology issues. The buying spilled over to the Dow Jones industrial average, which trended steadily higher. An initial pullback just after the rate hike news was quickly wiped out.
"The market is looking beyond the event to the future and is anticipating that the Fed has done enough to achieve its goals and we will enjoy a soft landing," said Charles Crane, market strategist at Spears, Benzek, Salomon & Farrell.
The Nasdaq rose 109.92 points, or more than 3 percent, to 3,717.57. The index is still up 13 percent from its low of 3,227 on April 17. But the composite is 26 percent off its March 10 high.
The Dow gained 126.79 points, or more than 1 percent, to 10,934.57, and the S&P 500 jumped 13.68 to 1,466.04.
"There were no surprises and we had already priced in a 50 basis point (half a percentage point) move," said Art Hogan, chief market analyst at Jefferies & Co. "We didn't exactly turn on the floodgates but we went from anemic volume to trending higher."
Market breadth was still positive, but volume remained moderate. Advancing issues on the New York Stock Exchange outpaced declining ones 1,675 to 1,272 as more than 948 million shares changed hands. Winners beat losers on the Nasdaq 2,329 to 1,754 on volume of more than 1.4 billion shares.
In currency markets, the dollar rose against the euro and the yen. Treasury securities edged higher.
Fed hikes interest rates
The meeting of the Federal Reserve's policy-making body culminated with an expected half-percentage-point interest rate hike, the first time since 1995 that the Fed has hiked rates by that much.
In the usual, briefly worded statement the central bank releases with its rate changes, the Federal Open Market Committee said "increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources."
"If the Fed is on the warpath with an eye to slowing the economy and trying to blunt inflation before it becomes a problem, by slowing the economy the Fed is hoping to address any imbalances between supply and demand, specifically for labor," said Crane. "It feels to me like the market is starting to look beyond the impact of the Fed and setting ourselves up for a second half where the wrestling match will not be between interest rates and valuations but rather between earnings and valuations."
The U.S. economy advanced at a 5.4 percent pace in the first quarter -- below the scorching 7.3 percent advance posted in the fourth quarter of 1999 but still above what most analysts and Fed officials deem a comfortable, non-inflationary rate of growth.
The Fed now has tightened credit for the sixth time since last June, bringing its main lending rate -- the fed funds rate -- up to 6.5 percent.
The June fed funds futures contract -- which indicates where investors are betting the fed funds rate will be by the end of June, currently has an implied yield of 6.95 percent, indicating investors are pricing in a 90 percent chance that the Fed will raise the benchmark rate by another half point at their next meeting.
Nevertheless, Abby Joseph Cohen, co-chairwoman of Goldman Sachs' investment committee, forecast steady stock market gains through next year, although not as robust as the advances of recent years.
Cohen, speaking at a Washington conference, also said economic growth was decelerating and that the worst increases in inflation -- brought about by the energy price run-up -- are past.
In the day's other economic data, consumer prices were unchanged in April, †below Wall Street forecasts of a 0.1 percent increase and the 0.7 percent gain posted in March. Excluding food and energy, the Consumer Price Index (CPI), the government's main inflation gauge, edged up 0.2 percent, in line with forecasts.
Analysts said the CPI numbers reflected a slowdown in economic growth and gave further evidence that the Fed was making the right choices in keeping inflation in line.
Separately, the Commerce Department reported that housing starts rose 2.8 percent to a 1.66-million-unit rate last month, slightly above economists' forecasts and partly reversing March's 11.2 percent drop.
Investors look forward
Analysts said investors were also gaining confidence from the belief that the Fed may be close to ending its rate hikes. But one analyst cautioned that was not a foregone conclusion.
"If the Fed believes there are inflationary concerns about the strength of the economy, they will act. They will continue to do what they need to do to slow the economy down," said Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum. "It's going to be a transition market and there's no need to be aggressive here. Use a little caution and let prices come to you."
Higher interest rates are often bad for stocks because they raise corporate borrowing costs and depress profits.
But one analyst linked the rally to investors' belief that the Fed is keeping inflation under control.
"They are very reassured that the Fed is doing it's job," Bernie McSherry, of McSherry & Company., told CNN's Street Sweep. "Even though they expect more rate increases, they feel there's steady hand on the tiller."
Looking ahead, Spear, Benzek's Crane said the market's next hurdle is not interest rate hikes but earnings growth. (412K WAV) (412 AIFF)
Jefferies' Hogan agreed. "Stay the course if you're a long-term investor. Don't buy stocks that don't have earnings - you need to be selective."
Another analyst said the rally was not a surprise. "The response to higher rates has (always) been some type of rally phase," said Joseph Barthel, chief investment strategist at Fahnestock & Co. "The Fed was always in the background but the reality is the market is oversold and right now you have a market responding to what it's been dealt with."
Nasdaq, Dow buoyed by tech stocks
Technology issues regained a firm foothold on the buying front. Dow component Intel (INTC: Research, Estimates) rose 3-3/4 to 121-7/8, Oracle (ORCL: Research, Estimates) gained 2-3/16 to 79-3/16, and Microsoft (MSFT: Research, Estimates) rose 1/8 to 69-1/2.
Other tech stocks were sold off after the rate hike announcement. Dell (DELL: Research, Estimates) shed 5/8 to 49-15/16.
After the closing bell, Spain's Terra Networks (TRRA: Research, Estimates) reached an agreement to acquire the U.S.-based Web portal Lycos (LCOS: Research, Estimates) for about $12.5 billion in stock. Lycos shares surged 11 to 72-5/8 while Terra slipped 3-5/16 to 53-9/16.
Hewlett-Packard (HWP: Research, Estimates) rose 6 to 140. The computer systems provider reported after the bell that it earned 87 cents a share, before one-time items, in the fiscal second-quarter, beating estimates of 82 cents a share. HP earned 73 cents a share in the year-earlier period.
Earnings still were being reported by retailers, whose fiscal calendars usually end a month later than most other companies.
J.C. Penney (JCP: Research, Estimates) slipped 7/16 to 18-5/16 after saying it intended to explore strategic alternatives to help focus on its core business and boost its share price. The nation's No. 5 retailer reported a less-than-expected decline in profit.
Dow component Home Depot (HD: Research, Estimates) slid 3-1/2 to 52 after posting first-quarter earnings of 27 cents a share. The results were in line with expectations and higher than the 21 cents a share in the year-earlier period.