Stocks get second wind at midday

NEW YORK (CNNMoney.com) -- Stocks rallied Friday as Wall Street cheered the Fed's decision to cut a little watched interest rate in a bid to soothe jittery markets, though stocks were off their best levels of the session.

The Dow Jones industrial average (up 174.53 to 13,020.31, Charts) jumped about 160 points, or 1.3 percent, at the start of the lunch hour after soaring more than 300 points at the open. The broader S&P 500 (up 24.89 to 1,436.16, Charts) climbed 1.7 percent while the tech-fueled Nasdaq composite index (up 43.90 to 2,494.97, Charts) posted a similar gain.

The jump at the open was a "knee-jerk reaction," said said Anthony Conroy, head trader at BNY Brokerage, as many investors who had been betting stocks would fall felt they had to jump back in. But stocks pulled back as investors tried to deconstruct the Federal Reserve's thinking behind the rate cut, said Conroy.

"The economy is hitting a speed bump - the question is how dramatic is that speed bump going to hit the economy," he said.

The Federal Reserve surprised Wall Street by cutting the discount rate, which the central bank charges qualified lenders - mainly banks - for temporary loans, by half a point to 5.75 percent.

The move, while largely symbolic, was an attempt by the central bank to "promote the restoration of orderly conditions in financial markets," the Fed said in a statement.

While the Fed did not cut its more closely watched fed funds rate, the action did sooth jittery investors who have been gripped by uncertainty about how hard the subprime mortgage and credit market problems would hit the broader economy.

The move provided a big lift to the financial sector. Shares of Wall Street banks Goldman Sachs (up $4.22 to $174.07, Charts, Fortune 500) and J.P. Morgan Chase (up $1.52 to $46.99, Charts, Fortune 500) climbed 2.4 percent and 3.3 percent respectively. Even the troubled mortgage lender Countrywide Financial (up $2.56 to $21.51, Charts, Fortune 500) rebounded nicely from Thursday's losses on the news, climbing nearly 11 percent.

The KBW Bank Index (up $3.29 to $109.70, Charts) and the AMEX Securities Broker/Dealer index (up $6.40 to $219.67, Charts) gained over 2 percent apiece.

Treasury prices turned mixed, with shorter-term debt moving higher. The 10-year benchmark edged higher lowering the yield to 4.67 percent from 4.68 percent late Thursday. Bond prices and yields move in opposite directions.

The New York Stock Exchange kept enthusiasm in check, however, instituting trading curbs on the upside for a little over an hour just after the market open.

Wall Street had been bracing for another bumpy session Friday, just a day after the Dow and the other major gauges fell enough during the session to be down 10 percent from the highs hit just a month earlier, a sign of a market correction.

But stocks made a stunning recovery. The Dow industrials, which had been down more than 300 points during the session, closed down just 15 points.

In other news Friday, consumer sentiment fell more than expected in August, according to a survey published Friday by the University of Michigan.

In corporate news, Dow component Hewlett-Packard (up $1.04 to $47.09, Charts, Fortune 500) reported better-than-expected earnings and issued a stronger-than-forecast outlook late Thursday, sending its shares about 2 percent higher.

Rival Dell (up $0.47 to $26.40, Charts, Fortune 500) said late Thursday it would have to restate four years of financial results after an internal audit revealed that top company execs sought accounting adjustments to reach quarterly performance goals. Dell stock rose about 1 percent.

Shares of organic grocer Wild Oats Markets (up $2.64 to $17.85, Charts) soared 17 percent after a bid by federal antitrust regulators to temporarily block its purchase by rival Whole Foods Market (up $1.91 to $43.08, Charts, Fortune 500) was rejected by a federal judge.

Early Friday morning, Midwest Express (up $0.86 to $15.56, Charts) accepted a raised $17-a-share offer from a group led by private equity firm TPG Capital and Northwest Airlines (down $0.00 to $15.98, Charts, Fortune 500), ending the hostile bid for the company by rival AirTran Holdings.

Overseas, markets in Europe soared in afternoon trade after the Fed discount rate cut. But Asian markets tumbled Friday, with Japan's Nikkei index skidding 5 percent, posting its worst day since the Sept. 11 attacks.

The dollar eased versus the euro and the yen.

Oil prices climbed, helped by the Fed's move and the growing strength of Hurricane Dean. Oil rose 93 cents to $71.93 a barrel on the New York Mercantile Exchange.

COMEX gold for December jumped $10.50 to $668.50 an ounce.