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Rate-Cut Hopes Lift Stocks

Robert Holmes

Stocks closed higher again Tuesday as two government reports suggesting a cooling economy gave Wall Street hope that the Federal Reserve might start considering rate cuts.

The Dow Jones Industrial Average gained 47.75 points, or 0.39%, to 12,331.60, and the S&P 500 was up 5.64 points, or 0.4%, at 1414.76. The Nasdaq Composite rose 3.99 points, or 0.16%, to 2452.38.

"This is a very powerful rally that can absorb a lot of bad news," said Ken Tower, chief market strategist with CyberTrader. "It seems to me that one should either buy strength and try to outperform the overall market, or buy the market average."

About 2.31 billion shares changed hands on the New York Stock Exchange. Advancers beat decliners by a 5-to-3 margin. Volume on the Nasdaq was roughly 2.05 billion shares, with winners and losers even.

By sector, housing stocks were the best performers of the session. The Philadelphia Housing Sector Index rose 2%. Metal stocks were among the few losers, with the Philadelphia Gold & Silver Index easing 1.2%.

Before trading began, the Labor Department said third-quarter unit labor costs, a key measure of inflation, rose only 2.3%, well below the preliminary estimate of 3.8%. Productivity showed a 0.2% increase, above the previous read of no growth.

Shortly after the open, the Commerce Department said factory orders for October fell 4.7%, more than the 4.5% decline that had been anticipated. Orders for September were revised lower. Last week, two other reports pointed to sluggishness in the manufacturing sector.

Believing that the evidence is stacking up in their favor, those wanting to see rate reductions weren't terribly bothered by a stronger-than-expected report on the service sector. The Institute for Supply Management said its November nonmanufacturing index was 58.9, topping estimates of 55.

"The lower-than-expected labor costs are pleasing the market, taking away from the inflation story," said Barry Hyman, equity market strategist with EKN Financial. "While the Fed isn't ready for a rate cut, it's one piece of data that may ease their fears."

Private equity firms have been on a buyout tear this year, and another deal has now been struck, this one in the insurance sector, where Direct General (DRCT Quote) will be acquired by Texas Pacific and Fremont Partners. Shares of Direct General surged $3.99, or 24.2%, to close at $20.50.

Homebuilder Toll Brothers (TOL Quote) posted fourth-quarter earnings and revenue that declined from a year ago, but the company indicated it believes the worst of the housing sector's softness is over. Toll Brothers gained 96 cents, or 3%, to $32.87.

AutoZone (AZO Quote) reported fiscal first-quarter earnings of $123.9 million, or $1.73 a share, rising from $114.4 million, or $1.48 a share, in the year-ago quarter. Revenue rose 4.1% to $1.39 billion. Shares of AutoZone ended higher by $4.82, or 4.2%, to $119.29.

Turning to the research front, UBS upgraded coffee seller Starbucks (SBUX Quote), and AG Edwards cut its rating on financial services giant American Express (AXP Quote). Starbucks rose 3.1% to $36.84. American Express overcame early weakness and tacked on 0.1% to $59.92.

Elsewhere, Bear Stearns downgraded Sirius Satellite Radio (SIRI Quote) to peer perform from outperform after the company cut its subscriber forecast for the year. Banc of America Securities cut its rating on Chevron (CVX Quote) to neutral from buy. Sirius sank 7.7% to $3.85, while Chevron added 0.6% to $73.95.

Away from equities, January oil futures fell by a penny to close at $62.43 a barrel. Natural gas lost 12 cents to $7.68 per million British thermal units. Gold edged lower by $3 to finish at $647.90 an ounce, and silver gave back 22 cents to $14.02 an ounce.

Treasuries fell, with the benchmark 10-year losing 4/32 in price to yield 4.44%. The dollar was higher against the world's major currencies.

Overnight in Asia, Japan's Nikkei eased 0.2% to 16,265, and Hong Kong's Hang Seng rose 1.3% to 18,944. In Europe, London's FTSE 100 was up 0.6% to 6086. Germany's Xetra DAX added 1.2% to 6373.