Stocks hit multi-month highs
Wall Street rallies after central bank holds rates steady, says economic outlook has improved.
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| The stock market since the president took office. |
NEW YORK (CNNMoney.com) -- Stocks rallied Wednesday afternoon after the Federal Reserve held interest rates steady, as expected, but issued a slightly more upbeat economic outlook.
After the close, Bank of America said Ken Lewis has been removed as Chairman, but will stay on as CEO and president.
The Dow Jones industrial average (INDU) gained 169 points, or 2.1%, closing at the highest point since Feb. 9.
The S&P 500 (SPX) index added 18 points, or 2.2% and ended at the highest point since Jan. 28. The Nasdaq composite (COMP) rose 38 points, or 2.3% and ended at the highest point since Nov. 3, 2008.
Stocks spiked even more in the first half hour after the 2:15 p.m. ET Fed announcement, but lost some steam late in the session.
Investors found positives in the day's bleak report on first-quarter economic growth, pushing stocks higher at the open. The markets extended those gains after the Fed opted to keep the fed funds rate, a key short-term interest rate, at a historic low near zero.
In its statement, the bank gave a more upbeat take on the economy than it has recently, although the tone remained cautious. The Fed said that "although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time."
The statement also said the pace of contraction appears to be somewhat slower, a belief that has helped lift stocks over the last two months, said Stephen Stanley, chief economist at RBS Securities.
"It's not like they were wildly optimistic, but they acknowledged that the data have been a little better, the consumer is stabilizing and that market conditions are improving, " he said. "They think that the improvement we've seen in financial market conditions over the last month is likely to continue."
Thursday preview: Quarterly results are due in the morning from Dow components Exxon Mobil (XOM, Fortune 500) and Procter & Gamble (PG, Fortune 500).
In a big day for economic news, reports are due on personal income and spending, weekly jobless claims, manufacturing in the Midwest and the first-quarter employment cost index.
Thursday is also the deadline for Chrysler to come up with the necessary concessions to avoid filing for bankruptcy. The company has already made deals with its union and creditors. Late Wednesday, reports said the company reached a deal with Italian automaker Fiat, fulfilling the government's third requirement for the company to avoid bankruptcy.
Recharging the rally: Stocks were rising again after two down sessions, recharging the advance that boosted the major gauges all more than 20% over a six-week period. Last week, only the Nasdaq gained, with the Dow and S&P 500 posting small losses.
After a period of consolidation on the back of a strong move, stocks are now moving higher, said Michael Church, president at Addison Capital.
"There have been some reports and earnings that were not as bad as expected and that's helped," Church said. "At one point, investors were fearing the apocalypse, but it's become clearer that that's not what is happening."
Wall Street retreated Monday on worries about the potential economic impact of swine flu. On Tuesday, stocks slipped on reports that Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) may need more capital should the recession deepen.
Fears that major banks may need more cash on hand have been in play this week ahead of the results of Treasury's "stress tests" of the largest companies, due next Monday.
"I think people are just looking forward to the tests being over," said Church.
GDP: The economy shrank at a faster-than-expected pace in the first quarter, surprising economists who were looking for an even slower pace of contraction after a rough fourth quarter of last year.
Gross domestic product fell at a 6.1% annualized rate in the first quarter after falling 6.3% in the fourth quarter. Economists thought it would fall at 4.7% pace, according to Briefing.com forecasts.
GDP was weighed down by a sharp decline in exports and plummeting business inventories. However, the inventory slowdown was seen as a positive, as it could mean the correction cycle is ending.
In addition, personal consumption rose, after falling in the previous quarter, raising hopes that consumer spending will pick up.
In other economic news, home loan applications fell last week to the lowest levels in more than a month due to a drop in refinancing demand.
Wednesday also marked President Obama's 100th day in office.
Banks: Citigroup (C, Fortune 500) has reportedly asked Treasury if it can pay out bonuses to certain workers, according to the Wall Street Journal. Citi has received $45 billion in federal bailout money and may need to raise more. Shares gained 8%.
Wells Fargo (WFC, Fortune 500), Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500) and Fifth Third (FITB, Fortune 500) were among the other gainers. The KBW Bank (BKX) sector index rose 5%.
Company news: Aetna (AET, Fortune 500) reported higher quarterly sales and earnings that topped estimates. But the health insurer also said it saw higher-than-expected medical costs. Shares slumped 10%.
Time Warner (TWX, Fortune 500), the parent of CNNMoney.com, reported weaker quarterly profit on slowing ad sales, but results were better than what analysts were expecting. Shares gained 1%.
Dendreon (DNDN) shares rallied 94% in its first day of trading after saying its experimental treatment for advanced prostate cancer extended the lives of men suffering from the disease by four months. Shares were halted after the Tuesday afternoon announcement.
Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than five to one on volume of 1.48 billion shares. On the Nasdaq, advancers topped decliners by over three to one on volume of 2.41 billion shares.
Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.09% from 3.01% Tuesday. Treasury prices and yields move in opposite directions.
Lending rates were mixed. The 3-month Libor rate fell to 1.04% from 1.05% Monday, according to Bloomberg.com. The overnight Libor rate was unchanged at 0.21%. Libor is a bank-to-bank lending rate.
Other markets: In global trading, most Asian and European markets ended higher.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for June delivery rose $1.05 to settle at $50.97 a barrel.
COMEX gold for June delivery rose $6.90 to settle at $900.50 an ounce. 
