Stocks Surge After Surprise Fed Rate Cut
Wednesday April 18
By Haitham Haddadin
<<NEW YORK (Reuters) - Stocks skyrocketed in midday trading on Wednesday, pushing the tech-heavy Nasdaq well above 2,000 for the first time in more than a month, after the Federal Reserve (news - web sites) surprised the market with its fourth interest rate cut this year to boost the sluggish economy.
``I'm ecstatic. It recognizes that the economy needs some further help,'' said Robert Armknecht, money manager at the $2-billion Galaxy Equity Growth Fund. ``It gets some liquidity back in the system and it's reassuring to the public, not just to investors.''
Traders were caught unaware by the half a percentage point rate reduction, which came in between scheduled meetings of the powerful central bank. Rate cuts increase consumer spending and lower borrowing costs. This helps boost corporate profits, which have been sagging.
The technology-laced Nasdaq Composite Index (^IXIC - news) jumped 181.98 points, or 9.46 percent, to 2,105.20, as it stood poised to chalk up its third biggest percentage gain ever.
The blue-chip Dow Jones industrial average (^DJI - news) surged 423.96 points, or 4.15 percent, to 10,640.69 and the broader Standard & Poor's 500 Index (^SPX - news) added 50.75 points, or 4.26 percent, to 1,242.56. The S&P is now officially out of bear territory, defined by a drop of 20 percent or more from its record high.
The indexes nearly doubled an early rally led by technology issues as investors were emboldened by better-than-expected quarterly profit reports from Intel Corp. (NasdaqNM:INTC - news) and other marquee names. Intel shares surged 20 percent.
Upbeat earnings news also came from AOL Time Warner Inc. (NYSE:AOL - news), the world's largest Internet and media company, which bucked the recent industry trend of gloomy results by reporting higher quarterly earnings. AOL Time Warner, the most active issue on the New York Stock Exchange (news - web sites), leaped $4.95 to $48.85.
``There are some good things happening in the market ... It certainly is in that bottoming process,'' said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. ''You are getting some key numbers beating Street estimates and that's a good sign.''
The Fed, noting the risks for the economy remain tilted to further weakness, lowered the bellwether federal funds rate, charged for overnight lending between banks, by 50 basis points to 4.50 percent. The Fed also cut the more symbolic discount rate, charged for emergency Federal Reserve loans to banks, by 50 basis points to 4.0 percent. That brings the total reduction in the funds rate so far this year to 200 basis points.
A key forecasting gauge for the U.S. economy fell in March but the decline matched Wall Street expectations. The Conference Board (news - web sites) said on Wednesday morning that the U.S. leading economic indicators fell 0.3 percent to 108.5 in March vs. a drop of 0.2 percent in February.
``The key here is investor and business confidence, and the only way the Fed can turn that around is by springing a surprise on the market,'' said Sung Won Sohn, chief economist at Wells Fargo. ``That's exactly what we got today.''
The bank surprised financial markets with a 50-basis-point rate cut on Jan. 3, outside of a regular Fed meeting -- which sparked a monster rally at the time. The central bank then cut rates two more times at scheduled meetings on Jan. 31 and March 20.
The Fed, which meets next in May, said this rate cut was based in part on softening capital investment, erosion of current and future profits and rising uncertainty in business outlook. It also cited a ``reduction in equity wealth on consumption'' and risk of slower growth abroad.
Some fund managers were cautious about the sudden easing, saying it may signal the economy is in really bad shape. ''There must be some other shoe waiting to drop I'd say,'' said Richard Babson, president of Babson-United Investment Advisors, which manages $1.8 billion. ``Maybe they are concerned about the darkening prospects for corporate balance sheets or debt. There may also be some greater exposure than already thought to Japan.''
Investors, however, were jumping into the market on Wednesday to snatch up beaten-down stocks, Babson noted earlier, after the latest tech results. ``People are looking ahead trying to time the bottom of the market and afraid they will be left behind,'' he said. Nasdaq hit two-year lows recently as corporate profit warnings rained down.
Soft demand for semiconductors left Intel's first-quarter net income down 82 percent year-on-year, but the results issued after Tuesday's close beat Street estimates.
The world's No. 1 computer chip maker also offered upbeat comments about the second half. The company's chief financial officer late on Tuesday expressed confidence the second half would be strong. Intel shares were the most active on the Nasdaq, shooting up $5.14 to $31.18.
Texas Instruments Inc. (NYSE:TXN - news), the world's No. 1 maker of computer chips for mobile phones, said first-quarter net income fell about 36 percent, but beat estimates. Its shares rose $3.31 at $37.31, or nearly 10 percent.
Coca-Cola Co. (NYSE:KO - news), the soft drinks giant, added $1.23 at $46.93 after it posted a quarterly profit that beat estimates. Another Dow stock, International Paper Co. (NYSE:IP - news), reversed an early loss although the world's largest forest products company said earnings fell 91 percent due to the slowing economy. It rose $1.52 at $38.62.>> |
