Bulls Stampede After Rate Cut

The Dow jumps 335 points, and the Nasdaq soars by 70.
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Updated from 4:11 p.m. EDT

Stocks in New York rallied sharply Tuesday after the

Federal Reserve

cut interest rates for the first time in more than four years.

The

Dow Jones Industrial Average

advanced 335.97 points, or 2.51%, to 13,739.39. The

S&P 500

climbed 43.13 points, or 2.92%, to 1519.78, and the

Nasdaq Composite

gained 70 points, or 2.71%, to 2651.66.

The rally ensued when Federal Open Market Committee, the Fed's policymaking arm, decided to lower the fed funds target rate by 50 basis points to 4.75%. Most analysts had expected a 25-point cut, so the surprise move boosted averages. It was the first rate reduction since June 2003.

In the accompanying statement, the Fed said the move was "intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

"The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally," the statement read.

Steven Sheldon, principal with SMS Capital Management, said the phrasing meant officials didn't want to be accused of doing too little, too late.

"The Fed is acting to try and prevent the problems from spiraling any further," he said. "The Fed will now have to see where the bottom of the housing sector is before they know when to stop cutting rates."

The central bank also slashed the discount rate by 50 basis points to 5.25%. It was the second cut to the discount rate, or the interest rate it charges banks that want to borrow, in about a month.

"The market loves this move, but I'm surprised the Fed was so aggressive," said Paul Mendelsohn, chief investment strategist with Windham Financial. "This is the way the market wanted to go, and it was just waiting for this decision.

"However, this creates a problem with the dollar and inflation," warned Mendelsohn. "There are some negatives still. But what the Fed is seeing is concerning them."

Richard Yamarone, director of economic research with Argus Research, said that other than giving the stock market another reason to rally, it is unclear what the Fed's decision does for the economy.

"The housing market certainly isn't going to emerge out of its 18-month recession any quicker," said Yamarone. "Nor are consumers about to pick up the pace of spending any faster than the current optimal pace."

Commodities shot upward, with crude setting yet another new intraday high. The October front-month oil contract rallied 94 cents to close at $81.51 a barrel. Gold futures fell 10 cents in the regular session before surging in electronic trading, climbing above the $730-an-ounce level.

Long-term Treasury prices sank, while the short end rallied. The 10-year was down 6/32, raising the yield to 4.48%, and the 30-year lost 1-5/32, yielding 4.78%. The 2-year and 3-year notes each gained roughly 5/32 in price.

The Philadelphia Housing Sector Index took off after the rate cut announcement, soaring 5.2%. Financial subsector indices also finished with gains, as the NYSE Financial Sector Index, the KBW Bank Index, and the Nasdaq Financial 100 Index all were higher by 3.9% or more.

Breadth was overwhelmingly positive and volume was strong. On the

New York Stock Exchange

3.56 billion shares changed hands, as advancers trounced decliners by nearly a 10-to-1 margin. Volume on the Nasdaq reached 2.07 billion shares, with winners outpacing losers about 4 to 1.

Stocks built on the momentum started by stronger-than-expected earnings data from

Lehman Brothers

(LEH)

and

Best Buy

(BBY) - Get Report

.

Lehman Brothers posted third-quarter earnings that topped Wall Street's estimates. Investors had worried that the broker's profit could take a big hit from the mortgage mess and subsequent credit-market woes. Shares rallied $5.87, or 10%, to close at $64.49.

Later this week,

Bear Stearns

(BSC)

,

Morgan Stanley

(MS) - Get Report

and

Goldman Sachs

(GS) - Get Report

are due to report.

Best Buy also helped ease some worries about consumer spending, posting earnings that were well above analysts' targets. The electronics retailer also raised its full-year profit forecast. Best Buy finished up $2.92, or 6.6%, to $47.46.

The main impetus for the rate cut is trouble stemming from bad loans in the subprime mortgage market, and the fear the broad economy will be dragged down.

After the previous session,

E*Trade Financial

(ETFC) - Get Report

said it will exit the wholesale mortgage business because of tightening conditions in the credit and financial markets. The broker also lowered its profit forecast for the year. E*Trade lost 21 cents, or 1.5%, to $14.

Bank of America

(BAC) - Get Report

was also out with comments Monday, saying that the recent turmoil in the credit market will have an impact on third-quarter earnings. The stock climbed $1.70, or 3.4%, to $51.21.

Subprime lender

NovaStar

(NFI)

dropped after suspending a planned dividend because of liquidity problems. Shares ended down 21 cents, or 2.6%, at $8.03.

Meanwhile, property marketing firm RealtyTrac said that the number of homes in default jumped 36% in August. RealtyTrac expects that total foreclosure filings will exceed 2 million this year.

Traders also had to deal with the Labor Department's producer price index, which unexpectedly plunged 1.4% last month. Economists expected the PPI for August to decline 0.3%. The core number, which excludes food and energy and is a main reading on inflation at the wholesale level, rose 0.2%, slightly above expectations.

"Increases in core wholesale prices indicate bringing core consumer price inflation down below Federal Reserve Chairman Ben Bernanke's target of 2% a year remains an illusive target," said Peter Morici, professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

Among analyst moves, Goldman Sachs downgraded Dow component

General Motors

(GM) - Get Report

to neutral from buy, citing valuation.

GM is still in negotiations with the United Auto Workers labor union over a new contract. The UAW has threatened to have workers strike, and the old contract has now expired, but the union has extended the deadline repeatedly as talks have gone on. Shares of GM added 54 cents, or 1.5%, to $35.77.

Overseas markets were mixed. Japan's Nikkei 225 fell 2%, and Hong Kong's Hang Seng was off 0.1%. In Europe, London's FTSE 100 rose 1.6%, and Germany's Xetra Dax advanced 1.3%.