Updated from 4:10 p.m. EDTStocks in the U.S. overcame the initial weakness that followed the Federal Reserve's rate cut and closed with substantial gains Wednesday. The Dow Jones Industrial Average went from up 100 points before the Fed released its comments on rates and the economy all the way into negative territory, but then the rebound began. When the final bell rang, the Dow had a gain of 137.54 points, or 1%, at 13,930.01. The S&P 500 jumped 18.36 points, or 1.2%, to 1549.38, and the Nasdaq Composite was better by 42.41 points, or 1.51%, at 2859.12. As had been widely expected, the Federal Open Market Committee, the Fed's policymaking arm, decided to lower the fed funds target rate by 25 basis points to 4.50%. It was only the second rate reduction since June 2003, with the last coming in September. In an accompanying statement, the Fed said that "the upside risks to inflation roughly balance the downside risks to growth," adding that "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation." "The key word is 'balance,' which took the market down
"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," the statement read. The central bank also reduced the discount rate by 25 basis points to 5%. It was the third cut to the discount rate, or the interest rate charged to banks that want to borrow, since mid-August. Most analysts agree that the next data point, which comes later this week in the nonfarm payrolls report, will be important in judging officials' future moves. "Friday's job report is now the next key number," added Mendelsohn. "Barring any major problem on Friday, it would indicate that growth is not slowing as fast as we think and the market can keep its upward bias." Peter Cardillo, chief market economist with Avalon Partners, said the Fed sent "a loud message" that they sacrificed containing inflation in lieu of economic activity. "Energy continues to rise and the dollar has been falling, and the market has been ignoring that," he said. "The Fed realizes that somewhere along the line that's going to mean inflation." In light of the Fed's renewed concerns over inflationary pressures, record crude prices appeared worse than before. The December crude contract crossed $94 a barrel for the first time, finishing with a gain of $4.15 at $94.53 a barrel.
Earlier, the Energy Department said oil inventories unexpectedly dropped by 3.9 million barrels last week, while gasoline and distillate inventories rose slightly. Treasury prices slid, with the 10-year note losing 19/32 in price, pushing the yield to 4.46%. The 30-year bond fell 26/32 in price, yielding 4.73%. The dollar rebounded after having set new lows against the euro. Breadth was positive. On the New York Stock Exchange 2.55 billion shares changed hands, as advancers topped decliners by a 12-to-5 margin. Volume on the Nasdaq reached 2.46 billion shares, with winners edging losers nearly 3 to 2. The gains that followed the Fed's decision pushed the Dow into positive territory for October. The blue chip average ended the month up 0.2%. The S&P 500 added 1.5%, and the Nasdaq surged 5.8%, its best monthly performance since July 2005. Commodity-related indices had the best performance for the session. The Philadelphia Gold & Silver Sector Index jumped 3.7%, the Philadelphia Oil Service Sector Index was higher by 2.6%, and the Amex Oil Index added 2%. Interestingly enough, transportation stocks also fared well despite rising oil prices. The Nasdaq Transportation Index rose 2.3% and the Dow Jones Transportation Average gained 1.4%. Before of the Fed's announcement, traders scrutinized several releases on the economic docket. The Commerce Department released its advance read on third-quarter gross domestic product, which beat expectations with a 3.9% increase.
Economists had forecast that GDP rose 3.1% last quarter, compared with a 3.8% rate in the second quarter. Ian Shepherdson, chief economist with High Frequency Economics, said that while the third-quarter number is positive on first blush, the market should expect fourth-quarter GDP to come in below a 2% clip. "
The key point here, though, is that things look very different in fourth-quarter post-turmoil," he said. "Residential investment plunged 20.1%. The fourth quarter will be worse." Also on the economic front, the Census Bureau said that construction spending unexpectedly rose 0.3% last month, compared with estimates of a 0.4% decline. At the same time, the Chicago purchasing managers' index declined to a reading of 49.7 for October, falling from last month's 54.2. Any reading below 50 indicates contraction. Earnings took a backseat to the Fed's rate decision, although several companies were reporting. Kraft Foods ( KFT) posted a third-quarter profit that dropped 20% from a year ago. Still, Kraft beat estimates once charges were stripped out. Kraft gained 81 cents, or 2.5%, to $33.41. Alcatel-Lucent ( ALU) posted a quarterly loss and trimmed its outlook. The company also replaced its financial chief and said it would cut 4,000 more jobs, sending the stock higher by 30 cents, or 3.2%, to close at $9.69. Elsewhere, Clorox ( CLX) reported a fiscal first-quarter profit that topped expectations, and Jones Apparel ( JNY) blew away estimates with its third-quarter report. Shares of Clorox ended up $1.57, or 2.6%, to $62.57. Jones Apparel jumped $1.24, or 6.3%, to $20.94. Away from earnings, Google ( GOOG) crossed the $700-a-share level for the first time ever. The Internet search giant rose $12.23, or 1.8%, to $707, the best close in its three-year history in the public markets. Overseas markets were mostly higher. London's FTSE 100 added 0.9%, the Paris CAC 40 was up 0.8%, and Germany's Xetra Dax was 0.5% higher. In Asia, Japan's Nikkei 225 added 0.5% overnight, while Hong Kong's Hang Seng eased 0.9%.