Dow spikes 420 points on rate cut

Wall Street surges, with blue-chip indicator seeing its best day in 5-1/2 years as investors hail central bank decision to cut rates by 3/4 of a percentage point.

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NEW YORK (CNNMoney.com) -- Stocks jumped Tuesday, with the Dow surging 420 points, its fourth-biggest one-day point gain ever, after the Federal Reserve cut the fed funds rate by three-quarters of a percentage point, surprising investors looking for a larger cut.

The Dow Jones industrial average (INDU) rose 420 points, its biggest one-day point gain since July 2002, for a gain of 3.5%. The broader Standard & Poor's 500 (SPX) index added over 54 points, its biggest one-day point gain since Jan. 2001, for a gain of 4.2%.

The tech-fueled Nasdaq composite (COMP) advanced over 91 points, its biggest one-day point gain since May 2002, for a gain of around 4.2%.

"The market reaction was certainly positive after a little pullback," said Matt King, chief investment officer at Bell Investment Advisors. "It seems like they found the sweet spot with the decision today."

The central bank cut the fed funds rate, a key short-term lending rate that impacts consumer loans, by 75 basis points, to 2.25%, missing bets for a cut of 100 basis points. There are 100 basis points in one percentage point. (Full story).

Stocks had rallied ahead of the news as investors welcomed better-than-expected quarterly earnings from Lehman Brothers and Goldman Sachs. But the market stumbled in the minutes after the 2:15 p.m. ET Fed announcement, before recharging in the last hour of trade.

The initial setback was likely a knee-jerk reaction because people looking for a bigger cut didn't get it, said Harry Clark, CEO at Clark Capital Management.

However, after digesting it, Wall Street was perhaps realizing that 75 basis points was the right decision, Clark said, in that it suggest both that the Fed remains on top of the problems in the economy, but is not so panicked as to need to cut rates by a full percentage point.

"I think a one-point move would have been too much, even if its what the Street thought it wanted," said Clark. "I think it was the right thing to do."

The Fed also cut the discount rate, which affects bank loans, by three-quarters of a percentage point, leaving it at 2.25%, after announcing an emergency quarter-point cut to that rate this weekend.

In the statement accompanying Tuesday's decision, Fed policy makers acknowledged the continued strain in the financial markets, the softer consumer spending environment and labor market, and also talked about higher inflationary pressure. (Read the statement here.)

Ongoing Fed action. The Fed has cut rates steadily since September as a means of shoring up the economy and combating a credit market crisis that has left Wall Street in its most precarious position in years.

The Fed has also injected billions into the economy. Most recently, the bank announced over the weekend that it has created another lending facility that allows big Wall Street firms access to short-term funding.

More moves along this line are what is needed said Clark, rather than additional rate cuts.

"They've taken some innovative measures lately," said Wan-Chong Kung, senior fixed-income portfolio manager at First American Funds. "They get it and they want to do what it takes to restore confidence to markets and to help the economy."

However, she said that the stock market's response has been skeptical in general, with any Fed-motivated gains tending to peter out after a session or two. "Hopefully the market will look at all the things the Fed has done on a cumulative basis and acknowledge that at some point, these things will have a broad impact," she said.

Financial earnings impress. Lehman Brothers (LEH, Fortune 500) surged 46% after it reported lower quarterly sales and earnings that beat estimates, despite taking $1.8 billion in writedowns for bad mortgage bets.

Lehman also sought to reassure investors that it was not in danger of seeing a fate similar to that of Bear Stearns. The company said it has maintained a strong liquidity position. Lehman shares plunged Monday on worries about its solvency.

Goldman Sachs (GS, Fortune 500) managed to report another quarter of better-than-expected sales and earnings, despite the ongoing market turmoil. Results, however, were sharply lower versus a year ago. Shares gained 16%.

Bear Stearns (BSC, Fortune 500) added 23% to trade at nearly $6 a share after tumbling 84% Monday on news that it had sold itself to JP Morgan Chase for $2 a share, marking a stunning collapse for the former No. 5 Wall Street brokerage. The stock traded at roughly $160 per share a year ago. Here's why the stock is trading so far above that $2 a share price.

Morgan Stanley (MS, Fortune 500) jumped nearly 18% ahead of its quarterly earnings, due before the start of trade on Wednesday.

A slew of other financial stocks surged as well, on both the Lehman and Goldman earnings and on the Fed announcement. Other gainers included Dow components Citigroup (C, Fortune 500), up 11%, Bank of America (BAC, Fortune 500), up 8% and AIG (AIG, Fortune 500), up nearly 10%.

Blue chip gains were broad based, with all 30 Dow components rising, and all by at least 1%. In addition to the financial stocks, the Dow's other big gainers were General Motors (GM, Fortune 500), Home Depot (HD, Fortune 500), Alcoa (AA, Fortune 500) and Intel (INTC, Fortune 500).

Intel also trades on the Nasdaq and was one of many tech stocks advancing on the session.

Other big tech advancers included Apple (AAPL, Fortune 500), Cisco (CSCO, Fortune 500), Oracle (ORCL, Fortune 500), Microsoft (MSFT, Fortune 500), Yahoo (YHOO, Fortune 500) and Dell (DELL, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners trounced losers 7 to 1 on volume of 1.95 billion shares. On the Nasdaq, advancers topped decliners 3 to 1 on volume of 2.41 billion shares.

Economic news. New home construction fell in February to an annual pace of just over a million properties, beating forecasts for a bigger drop. Building permits, a measure of builder confidence, tumbled more than expected.

The Producer Price Index (PPI), which measures inflation at the wholesale level, rose as expected in February. But core PPI, which excludes volatile food and energy prices, came in higher than expected.

Other markets. U.S. light crude oil for April delivery climbed $3.74 to $109.42 a barrel on the New York Mercantile Exchange. Prices hit a record $111.80 in electronic trading Monday.

COMEX gold for April delivery rose $1.71 to $1,004.31 an ounce. Gold hit an all-time trading high of $1,033.90 an ounce on Monday.

Treasury prices slumped, as investors cashed in after the previous session's big rally. The selloff raised the yield on the benchmark 10-year note to 3.47% from 3.30% late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar gained against the euro after hitting another all-time low on Monday. The greenback rallied against the yen after touching a more than 12-year low Monday. To top of page

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