The stock market's resilience in the face of bad news earlier this week wasn't a fluke after all. Rather, it was a sign of the underlying bullishness that revealed itself in furious fashion Wednesday. Despite a warning late Thursday by Texas Instruments ( TXN), news of two investigations into Freddie Mac's ( FRE) accounting, and a lackluster beige book survey, major indices rose early and finished with a flurry. The market's ascent accelerated after the 2 p.m. release of the Federal Reserve's beige book survey, which said the U.S. economy "remained sluggish" in April. Rather than causing consternation, the report sparked celebration as investors anticipated the Fed will now ease by 50 basis points at its June 24-25 policy meeting rather than a mere 25 basis points. Why equity investors continue to believe more rate cuts will cure the economy's ills remains elusive, especially considering 12 rate cuts from January 2001 until November 2002 proved to be no panacea. Perhaps rate cuts are merely the most obvious sign of the Fed's vigilance to fight deflationary pressures, which is what is really buoying financial assets. "In fact, central banks have a number of other means at their disposal to stimulate spending should nominal interest rates hit the zero bound," Fed Vice Chairman Roger Ferguson said Wednesday, the latest in a series of such comments from central bankers. The Dow Jones Industrial Average rose 1.4% to 9183.22, its first close above 9100 since July 1, 2002. The S&P 500 jumped 1.3% to 997.48, while the Nasdaq Composite climbed 1.1% to 1646.02. Regardless of why, faith in the Fed remains quite intense, as evinced by Wednesday's action. "Cyclical stocks carried the day as players expect better growth and earnings in the third and fourth quarters, spurred by low rates," observed Scott Curtis, head of U.S. equity trading at Credit Lyonnais. (In other words, the "second-half recovery" story still compels.)
Indeed, the Dow's rise was powered by cyclical names such as Boeing ( BA) and Caterpillar ( CAT), as well as IBM ( IBM), which rose 2.8% after some positive comments from Merrill Lynch. (Big Blue is, of course, also sensitive to the economy but it's not considered a "cyclical" stock by most.) Merrill Lynch also helped sustain buying pressure in biotech stocks by suggesting profit-taking in recent days provided an entry point. "Valuations remain well within the historical range, and window dressing into the end of the quarter should bode well for biotechs," Merrill analyst Eric Ende wrote. Fund managers often seek to secure better closing prices at month and quarter ends for their holdings by buying shares of names they already own. Known as window dressing, the practice isn't illegal but doesn't have much to with fundamentals either. The Amex Biotech Index rose 3.2%. Although the Philadelphia Stock Exchange Semiconductor Index sagged 0.6% under the weight of TI's warning, momentum was sustained in other recent favorite groups, most notably homebuilders. The S&P Homebuilding Index leapt 7.1% on the promise of still-lower interest/mortage rates and better-than-expected results from Lennar ( LEN) late Tuesday. Lennar rose 8.2% while Texas Instruments lost 7.5%. About 1.5 billion shares traded on the NYSE and 1.9 billion in over-the-counter activity, still down from last week's levels but up from Monday and Tuesday. Advancing stocks bested decliners by 23 to 9 in Big Board trading, where new 52-week highs trounced new lows 415 to 5, and by 3 to 2 in Nasdaq action, where new highs led 195 to 7. Treasury prices rose earlier in the day on anticipation of a Fed ease but faded in the afternoon as stocks soared and the government sold $15 billion of five-year notes at record-low yields. The price of the benchmark 10-year note fell 8/32 to 102 8/32, its yield rising to 3.21%.
Either way, that's a pretty bearish call for a day in which optimism was seemingly rampant.