Wall St. soars on Fed move
Central bank's unexpected medicine is just what stock market wanted
NEW YORK (CNNfn) - U.S. stocks rallied Wednesday after the Federal Reserve rocked Wall Street with a surprise interest rate cut, lifting hopes that corporate profits will recover sooner than expected.|
The central bank lowered short-term borrowing costs by half a percentage point, its fourth reduction of the year, jolting a market not expecting a move for another month.
Coming about 80 minutes into the trading session, the rate cut turned early gains into a full-throttle rally, handing the Nasdaq composite index its fourth-biggest percentage gain on record and pulling the S&P 500 out of a bear market.
Investors, already heartened by some unexpectedly strong corporate results, poured into stocks -- which, though higher in April, have fallen steadily over the last year.
"The market was up 5 percent and then the Fed gave us this gift," Art Hogan, market strategist at Jefferies & Co., told CNNfn's The Money Gang.
The Fed moved to revive a stalling economy. Still, many analysts expect more bad news from the nation's corporations to keep the markets from a sustained advance. But any pullback will have to wait for at least a day.
The Nasdaq composite index jumped 156.22 points, or 8.1 percent, to 2,079.78, its highest close in more than five weeks. The Dow Jones industrial average rose 399.10, or 3.9 percent, to 10,615.83. But the Dow's third-biggest point gain on record was nowhere near one of its top percentage advances.
The Standard & Poor's 500, the broadest of the three indexes, jumped 46.35 points, or 3.9 percent, to 1,238.16. The gains pulled the S&P out of the bear market it entered March 12 when the index fell more than 20 percent below its record high.
Treasury securities, which suffered during April's stock market gains, moved higher. And after holding up well against the major currencies this year, the dollar fell against both the euro and yen.
More stocks rose than fell in heavy trading volume. Advancing issues on the New York Stock Exchange topped decliners 2,048 to 1,067 as 1.9 billion shares changed hands. Nasdaq winners topped losers 2,887 to 1,148 as 3.1 billion shares traded, the second-busiest session for the electronic market.
Another Fed rally
The Fed's move helped build on earlier gains sparked by several promising corporate profit reports. But overall earnings are on track to post their worst quarter in a decade, hurt by a big drop in consumer and business spending.
Investors hope the latest rate cut, over time, could reverse that trend by making it cheaper to borrow money. The fed funds rate, the rate that banks charge each other for loans, now stands below the point at which the Fed began raising rates in mid-1999. Within hours, several financial institutions lowered their prime lending rate.
Wall Street's latest rally recalls one on Jan. 3 when the Fed's last surprise rate cut led to a record 14 percent gain for the Nasdaq. Since then, the central bank lowered rates twice more. But stocks kept falling and economists scrambled to forecast the next inter-meeting move. That talk quieted in recent weeks amid signs of a stabilizing economy and stock market, making the Fed's latest move all the more dramatic.
"I think investors underestimated (Fed Chairman) Alan Greenspan's sense of show business." James Annable, chairman of WingspanBank.com, told CNNfn's Street Sweep.
Stocks began Wednesday higher after some of the nation's biggest companies, including Intel, General Motors, AOL Time Warner and J.P. Morgan Chase, posted first-quarter earnings that beat Wall Street's profit expectations.
Intel, the world's biggest chip maker, said first-quarter profit fell to 16 cents per share. But that topped forecasts. Looking ahead, the world's biggest chipmaker suggested that the slowing demand for microprocessors has at least stabilized.
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Another chipmaker, Texas Instruments (TXN: up $2.14 to $36.14, Research, Estimates), gained after it also reported better-than-expected quarterly results.
Even Hewlett-Packard (HWP: up $2.65 to $31.90, Research, Estimates), which warned of disappointing second-quarter earnings and flat third-quarter revenue, rose after investors focused on the computer maker's comments that it has hit bottom with its consumer business and sees some improvement in its enterprise business.
AOL Time Warner (AOL: up $5.10 to $49.00, Research, Estimates), the nation's biggest media company and parent of CNNfn, posted a gain in first-quarter earnings that topped forecasts.
Technology firms weren't the only winners. Carmaker General Motors (GM: up $3.17 to $56.80, Research, Estimates) reported first-quarter earnings that were nearly double what analysts expected.
J.P. Morgan Chase (JPM: up $3.73 to $49.10, Research, Estimates) surged after reporting first-quarter earnings that beat forecasts. Other financial stocks also gained, including Citigroup (C: up $2.13 to $50.05, Research, Estimates) and American Express (AXP: up $3.60 to $42.58, Research, Estimates).
Shares of IBM rallied ahead of its quarterly profit report due after the market closes. IBM (IBM: up $6.80 to $106.50, Research, Estimates) the world's largest technology company by sales, ultimately said profits rose to 98 cents per share, matching forecasts.
But is it sustainable?
The session's rally did little to silence questions about whether the gains will become just another opportunity to sell stocks in the days ahead. All market surges of the last 13 months have led to lower lows. And this one may be no different.
"This euphoria is probably going to wear off for the Nasdaq and Dow coming into tomorrow," said Jefferies & Co.'s Hogan.
The major stock indexes are still lower than where they were when the Fed first cut rates in January. At the same time, the latest rally makes the lows of the year seem more and more like the market's true bottom. The Nasdaq is now up about 27 percent from its April 4 close, while the Dow industrials are 13 percent from the late-March nadir.
Investors who bought General Electric (GE: up $2.43 to $47.89, Research, Estimates), the most valuable company in terms of market capitalization, on March 22 are sitting on gains of more than 27 percent.
Hours before the Fed cut rates, Goldman Sachs' market strategist Abby Joseph Cohen once again called stocks undervalued. "We do not expect an intractable recession, and expect profit growth to reaccelerate in the second half of 2001," she wrote in a note to clients Wednesday.
But Cohen did lower her year-end target for the S&P 500. Her new 1,550 target, down from 1,650, would mean 25 percent gains from current levels.
Trade deficit shrinks
Wall Street got a fresh batch of economic data before the Fed's move. The trade deficit narrowed to $27 billion in February, the government said, as demand for imports tumbled amid the economy's slowdown.
For years, demand for imports has outstripped its exports, and that's still the case. But the smallest trade deficit since December 1999 tempted some analysts to raise their forecasts for first-quarter gross domestic product, to be released next week.
"These data, combined with everything else that has been reported, suggest that Q1 GDP should rise comfortably above 1.0 percent," said Steven Wood, economist at FinancialOxygen.com.
Still, an indicator designed to forecast the economy's future direction pointed to weakness. The Conference Board, a private research group, said its index of leading economic indicators fell 0.3 percent in March.
In its rate-cut statement, the Fed cited weakening corporate profits, a poor business outlook and the potential for lower consumer spending that can come with falling stock prices. The central bank also suggested that even lower borrowing costs lie ahead.
"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," said the Fed, which also cut the rate it charges its member banks by half a percentage point.
Despite the move, not all stocks rose. Defensive shares, which have gained amid the economy's slowdown, pulled back. They include drugmakers Johnson & Johnson (JNJ: down $0.50 to $93.95, Research, Estimates) and Merck (MRK: down $1.55 to $79.30, Research, Estimates).
But stocks whose fortunes are most tied to the economy soared. Among them were Wal-Mart (WMT: up $3.49 to $52.73, Research, Estimates), Home Depot (HD: up $3.70 to $45.61, Research, Estimates), and 3M (MMM: up $7.10 to $116.00, Research, Estimates).
"The Fed is telling us today they want to stay ahead of the economic curve," Bill Sullivan, money market economist at Morgan Stanley Dean Witter, told CNNfn's Street Sweep.
--- Staff Writer Mark Gongloff contributed to this report.