Drop in home sales gives stocks a boost
NEW YORK » Wall Street showed signs of life yesterday, closing sharply higher after a drop in sales of previously owned homes and sturdy economic growth calmed investors' inflation jitters and motivated them to buy stocks following a two-week decline.
While first-quarter gross domestic product growth was revised upward to an annual rate of 5.3 percent, that figure came in below forecasts for a 5.8 percent gain. The adjustment came as evidence that the economy is expanding but at a controlled pace, which could keep the Federal Reserve from lifting short-term lending rates.
The GDP's inflation component was unchanged at a 3.3 percent increase, further easing anxiety over escalating prices. Meanwhile, decreased sales of existing homes stirred Wall Street's hopes that a cooling housing market will limit the pace of economic growth.
Michael Gregory, a senior economist at BMO Nesbitt Burns, said a gradual pullback in median home prices should weaken consumer spending as home equity values fall, an upbeat sign for investors uncertain about whether the Fed has hiked interest rates enough to thwart demand and contain inflation.
"The big question now is will (the economic slowdown) happen fast enough to stop the Fed from raising rates in June," Gregory said. "Probably not, but it could point to an August pause. Inflation tends to creep up after the economy has turned -- we have to see how that unfolds."
Stocks built on a modest advance from the previous session, when the major indexes fluctuated wildly before a late rally pushed them into positive territory. But the recent erratic trading showed investors were still nervous about the economy's health and have been unwilling to take bets.
At the close, the Dow Jones industrial average gained 93.73, or 0.84 percent, to 11,211.05. The Dow is 3.8 percent off its six-year closing high of 11,642.65, reached May 10.
Broader stock indicators were sharply higher. The Standard & Poor's 500 index added 14.31, or 1.14 percent, to 1,272.88, and the Nasdaq composite index jumped 29.07, or 1.34 percent, to 2,198.24.
Advancing issues led decliners by 4 to 1 on the New York Stock Exchange, where consolidated volume of 2.57 billion shares trailed the 3.23 billion shares that changed hands Wednesday.
Bonds fell late in the session, with the yield on the 10-year Treasury note rising to 5.07 percent from 5.04 percent late Wednesday. The U.S. dollar plunged against the Japanese yen.