Rate-Cut Rally Goes On

Stocks' Fed-inspired move higher continues for a second day.
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Updated from 4:02 p.m. EDT

Stocks continued to march higher Wednesday, retaining their momentum after the

Federal Reserve's

surprise decision to cut the overnight fed funds rate by 50 basis points.

After rising more than 125 points earlier, the

Dow Jones Industrial Average

pared its gains but still closed ahead by 76.17 points, or 0.55%, at 13,815.56. The

S&P 500

was up 9.25 points, or 0.61%, at 1529.03. The

Nasdaq Composite

rose 14.82 points, or 0.56%, to 2666.48.

The Dow has now jumped 7.6% since it last closed below the 13,000 level a month ago. The S&P 500 is only 25 points away from its record close, set on July 19.

Breadth was positive and volume was strong. On the

New York Stock Exchange

3.73 billion shares changed hands. Volume on the Nasdaq reached 2.12 billion shares. Winners outpaced losers about 2 to 1.

Major averages in the U.S. had one of their best performances of the year on Tuesday after the Federal Open Market Committee, the central bank's policymaking arm, cut interest rates by 50 basis points. Most analysts had anticipated a cut of only 25 basis points. It was the first rate cut in more than four years.

By the end of the day, the Dow had rallied 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 gained 70 points, or 2.71%, to 2651.66.

"

Investors should take yesterday's move as confirmation that the Fed is behind the bulls on the economy and the market 100%," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "This was a technical breakout and a fundamental and psychological lift."

Overseas markets followed U.S. averages higher. Overnight, Japan's Nikkei 225 surged 3.7%, and Hong Kong's Hang Seng rose 4%. In Europe, London's FTSE 100 and the Paris CAC 40 were up roughly 3%. Germany's Xetra Dax was up 2.3%.

While traders were still cheering the Fed's move, there was plenty to contend in the new session. The Labor Department said its consumer price index for August slipped 0.1%, compared with expectations for no change. As expected, the core index, which excludes food and energy and is a key measure of inflation, rose 0.2%.

Ian Shepherdson, chief economist with High Frequency Economics, said the CPI data are a sign that "the Fed's ease yesterday was not a gamble."

"The exact core month-over-month number was enough to nudge down the year-over-year rate to 2.1% from 2.2%," said Shepherdson. "We expect a dip below 2% early next year. Either way, core inflation has now been falling for nearly a year."

Meanwhile, investors also had to sort through data about the flailing housing market. The Census Bureau said that housing starts fell 2.6% in August, compared with a 6.9% drop in July. Building permits were down 5.9% last month, steeper than the 1.7% decline in July.

Additionally, the Mortgage Bankers Association said its weekly applications survey index rose last week to a reading of 673.2 from 657.4 the week before.

Broker earnings were again in focus.

Morgan Stanley

(MS) - Get Report

posted a 17% decline in third-quarter earnings, and the results fell well short of the Thomson First Call average estimate. Shares of Morgan Stanley lost $1.48, or 2.2%, to $67.03.

The report came a day after

Lehman Brothers

(LEH)

posted a better-than-expected quarter. Later this week,

Bear Stearns

(BSC)

and

Goldman Sachs

(GS) - Get Report

will report their quarterly results.

Elsewhere, foodmaker

General Mills

(GIS) - Get Report

posted fiscal first-quarter results that increased 8% from a year ago, beating estimates by a penny. The stock rose 24 cents, or 0.4%, at $58.91.

Stubbornly high oil prices wasn't nagging traders. Crude earlier topped the $82-a-barrel level for the first time ever before pulling back. The October front-month contract finished up 42 cents at $81.93 a barrel.

Crude rallied after the Energy Department's weekly inventory report said crude stocks dropped by 3.8 million barrels last week. Gasoline stocks rose by 400,000 barrels, and distillates also increased.

U.S. Treasury bonds continued to slide. The 10-year note was down 14/32 in price, yielding 4.53%. The 30-year bond shed 1-2/32, raising the yield to 4.83%.

Among analysts' actions, UBS cut its ratings for merger partners

Sirius Satellite Radio

(SIRI) - Get Report

and

XM Satellite Radio

(XMSR)

to neutral from buy. Sirius declined 4.3% to close at $3.35, and XM slid 5.5% to $14.