Wall Street cheers Fed, day 2

NEW YORK (CNNMoney.com) -- Stocks rose Wednesday, gaining for a second session after the Fed cut a key interest rate by a half-point, reassuring investors worried that the mortgage and credit market malaise could send the economy into recession.

The Dow Jones industrial average (Charts) added around 76 points. The blue-chip leader had jumped 336 points Tuesday, scoring its biggest one-day point gain in nearly 5 years.

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The broader S&P 500 (Charts) index gained 0.6 percent and stood less than 25 points below its all-time high in July.

The tech-heavy Nasdaq composite (Charts) climbed almost 0.6 percent. The Russell 2000 (Charts) small-cap index added nearly 1.4 percent, after rising 3 percent on Tuesday.

Stocks had risen through the morning, lost a little steam in the early afternoon and then pushed higher again later in the session.

"We had a strong response to the rate cut yesterday and we're seeing a follow through today," said John Davidson, president and CEO of PartnerRe Asset Management.

"Not only is the stock market reacting well, but we're also seeing relief in the credit markets," he said.

Treasury bond prices slumped, boosting the corresponding yields. The dollar slumped versus the euro. Gold prices jumped and oil prices ended at a record high for the third day in a row.

Thursday morning brings earnings reports from Bear Stearns (Charts, Fortune 500), Goldman Sachs (Charts, Fortune 500) and Circuit City (Charts, Fortune 500).

Thursday also brings several economic reports after the start of trading, including the leading economic indicators and the Philadelphia Fed index - a regional manufacturing reading.

Also of interest to Wall Street Thursday: Federal Reserve Chairman Ben Bernanke is due to testify on Capitol Hill as part of a hearing on the subprime mortgage crisis.

Treasury Secretary Henry Paulson is also due to testify.

Stocks surged Tuesday after the central bank cut the fed funds rate by a half-percentage point to 4.75 percent, reassuring investors that it was taking an aggressive response to the credit and mortgage market meltdown.

Most Wall Streeters had been expecting the bank to cut the fed funds rate for the first time in four years, but had been divided as to whether a quarter- or half-percentage point would be more appropriate. The fed funds rate impacts a variety of consumer loans.

In its statement, the central bank addressed the recent turmoil in the financial markets, acknowledged the threat it could pose to the economy, and left the door open for more rate cuts in the future.

The move was important for the economy and for stock investors, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. "It's very positive. It shows the Fed stands ready to act."

Tuesday's economic news seemed to support the Fed's decision, including reports showing continued weakness in housing and little inflationary pressure.

In particular, the mild inflation reading was allowing investors to come in and continue to buy Wednesday, Sparks said.

While the response so far has been positive, the question is what happens after investors get over the euphoria of the Fed's move, Davidson said.

"Longer term, we have to see if this provides relief to the housing market, the credit market and the consumer and if that translates to earnings," he said.

Morgan Stanley (Charts, Fortune 500) reported a drop in quarterly earnings versus expectations for a rise, and a smaller-than-expected rise in quarterly revenue. The bank is one of many this week reporting results and investors are looking closely to see how hard the sector has been hit by the credit and mortgage market turmoil.

Investors initially shrugged off Morgan Stanley's earnings, pushing the stock higher as part of a broad financial sector advance.

But the sector surged petered out in the afternoon and dragged Morgan Stanley stock down with it.

Mortgage lenders including Countrywide Financial (Charts, Fortune 500) and Accredited Home Lenders (Charts) both bounced.

Countrywide's CEO made bullish comments about his company's financial outlook Tuesday night, following the Fed decision.

Accredited and private equity firm Lone Star have reached a compromise that allows Lone Star to complete its purchase of Accredited.

However, a morning run for home builders lost momentum.

Among decliners, CarMax (Charts, Fortune 500) fell 15 percent in active trade after the used car retailer cut its 2007 earnings outlook. The forecast overshadowed the company's higher quarterly sales and earnings.

Nonetheless, gains were pretty broad based, with 23 out of 30 Dow components rising, led by economically-sensitive stocks such as Alcoa (Charts, Fortune 500), Caterpillar (Charts, Fortune 500) and Honeywell (Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners trounced losers by almost two to one on volume of 1.67 billion shares. On the Nasdaq, advancers beat decliners by more than three to two on volume of 2.21 billion shares.

Housing starts fell to a 12-month low in August, according to a government report that also showed a big drop in building permits, a measure of builder confidence.

But another government report was more positive, showing a surprise drop in consumer prices in August, versus forecasts for a flat reading.

Treasury prices tanked, pushing the yield on the 10-year note to 4.53 percent from 4.47 percent late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar slumped against the euro and was little changed versus the yen.

U.S. light crude oil for October delivery rose 42 cents to settle at $81.93 a barrel on the New York Mercantile Exchange, briefly hitting a fresh record trading high of $82.50 after a report showed a tepid rise in weekly crude oil and gas inventories.

Oil prices ended the previous session at a record closing high. However, the record price remains below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

COMEX gold for December delivery rallied $5.80 to $729.50 an ounce.