Wall Street darts higher after rate cut
NEW YORK » Wall Street stormed higher yesterday as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve's decision to cut interest rates by three-quarters of a percentage point. The Dow Jones industrial average soared 420 points, its biggest one-day point gain in more than five years.
The central bank's benchmark fed funds rate is now at 2.25 percent -- its lowest level since December 2004.
In its statement, the Fed said "recent information indicates that the outlook for economic activity has weakened further," but also that "uncertainty about the inflation outlook has increased."
Quarterly results from Lehman Brothers Inc. and Goldman Sachs Group Inc. early yesterday gave great comfort to a market fearful about investment banks weakening further -- and hurting the rest of the economy -- due to losing bets on mortgage-backed securities. After Sunday's news that the stricken Bear Stearns Cos. was being bought by JPMorgan Chase & Co. at a bargain price of $2 a share, both Lehman and Goldman posted quarterly profits early yesterday that were significantly lower than they were a year ago, but higher than analysts predicted.
"The earnings this morning allayed investors' fears that there's going to be a hard collapse," said Jim Herrick, director of equity trading at Baird & Co.
It will take some time before anyone knows whether the market is back on a true upward track, or is just staging another bear market rally. The Dow jumped 416 points just last Wednesday after a $200 billion loan pledge from the Fed. A great deal of those gains evaporated late last week on worries about Bear Stearns.
Yesterday the Dow closed up 420.41, or 3.51 percent, at 12,392.66. The Dow's point gain was the largest point jump for the Dow since a 447-point advance on July 29, 2002, when Wall Street was also struggling with a protracted decline.
The Standard & Poor's 500 index rose 54.14, or 4.24 percent, at 1,330.74, and the Nasdaq composite index rose 91.25, or 4.19 percent, to 2,268.26, the steepest percentage gain for the tech-heavy index in five years. The Russell 2000 index of smaller companies rose 31.45, or 4.83 percent, to 681.93.
Advancing issues outnumbered decliners by about 9 to 1 on the New York Stock Exchange, where consolidated volume came to 5.38 billion shares, compared with 5.69 billion shares traded Monday.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.50 percent from 3.30 percent late Friday.
Meanwhile, the Labor Department reported a 0.3 percent rise in its Producer Price Index for February, in line with estimates, but the core PPI, which strips out food and energy prices, rose by a greater-than-expected 0.5 percent.
Rate cuts usually spur growth, but they also drive down the dollar, which in turn lifts commodities prices. It's likely that the uncertainty will lead to some more pullbacks until investors have a sense that the economy is indeed recovering.
Following the Fed's move, the dollar regained ground against some major currencies, while gold prices fell and crude oil surged $3.74 to settle at $109.42 a barrel on the New York Mercantile Exchange.