Anticipated rate cut sends stocks higher
NEW YORK » A jittery Wall Street advanced yesterday, reversing some of Friday's sharp losses as investors took a dismal new home sales report as a sign the Federal Reserve will lower rates this week.
The Dow Jones industrial average rose more than 176 points in a session that was relatively calm when compared to the turbulence of last week.
On the surface, the advance appeared surprising after the Commerce Department reported sales of new homes in December fell by 4.7 percent and that 2007 new home sales plunged by a record 26.4 percent compared to 2006. But while the report at first exacerbated the market's concern that the housing and mortgage crises are causing a recession, it also raised hopes that the Fed might cut rates again by a wide margin to stoke the weakening U.S. economy.
"Anticipation of another Fed rate cut is the main magnet in the market today," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.
He was skeptical the gains would stick -- anything the Fed decides after its two-day meeting lets out tomorrow could be met with disappointment. If the rate cut is small or nonexistent, the market will likely be unsatisfied; if the cut is wide, the market may worry the economy is worse than it thought.
"If we do rally into a Fed rate cut, we have a lose-lose situation," Goldman said.
And traders who bet on the Fed's next move were pricing in a more than 80 percent chance of a half-point cut.
"Any less than that could be a problem," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.
The Dow rose 176.72, or 1.45 percent, to 12,383.89 after falling as many as 95 points in morning trading. On Friday, the blue chip index tumbled 171 points after a two-day advance of more than 400 points.
Broader stock indicators also advanced yesterday. The Standard & Poor's 500 index rose 23.36 or 1.76 percent, to 1,353.97, while the Nasdaq composite index rose 23.71, or 1.02 percent, to 2,349.91. The Russell 2000 index of smaller companies rose 13.79, or 2.00 percent, to 702.39.
Advancing issues outnumbered decliners by nearly 3 to 1 on the New York Stock Exchange, where consolidated volume came to 3.96 billion shares, compared to 4.78 billion on Friday.
Crude oil rose 28 cents to settle at $90.99 a barrel on the New York Mercantile Exchange.
Government bond prices slipped as stocks rose. The 10-year Treasury note's yield, which moves opposite its price, was unchanged at 3.58 percent -- and did not move in after-hours trading.
Alexander Paris, economist and market analyst for Chicago-based Barrington Research, said most investors were waiting for the Fed to announce its decision tomorrow before making any big bets. That was one of the reason for a quiet trading day where the Dow stayed mostly in positive territory.
"It was calmer than I expected it would be, especially when you have lots of news for investors to look at," he said. "But, it's the Fed offsetting the news -- and people don't want to make a big move when you don't know what they're going to do about interest rates."