Stocks Rise on Fed Stimulus Hopes


NEW YORK ( TheStreet) -- The major U.S. equity indices finished sharply higher on Tuesday as risk-tolerant investors bet that additional fiscal stimulus is forthcoming from the Federal Reserve.

For the day at least, Wall Street was looking past the eurozone's ongoing troubles as Spain continued to deal with rising borrowing costs. Reuters reported that the country had to pay "a euro era record price to sell short-term debt" on Tuesday.

The Fed is wrapping up a two-day policy meeting on Wednesday afternoon with the majority of central bank watchers expecting a move toward increased accommodation, most likely an extension of Operation Twist.

The Dow Jones Industrial Average rose more than 95 points, or 0.75%, to close at 12,837. The blue-chip index ran as high as 12,899 during the session and is now up 5.1% so far in 2012.

The S&P 500 advanced 13 points, or 0.98%, to finish at 1358, marking a fourth straight day of gains. It's now up 8% year-to-date.

The Nasdaq Composite was the biggest winner, surging more than 34 points, or 1.2%, to settle at 2930. The index has appreciated 12.5% since the start of the year.

Of the 30 Dow components, 23 were gaining ground, led by Bank of America ( BAC), Microsoft ( MSFT) , Caterpillar ( CAT) and Alcoa ( AA).

The financials, energy and basic materials sectors saw the biggest gains as all ten large-cap sectors within the S&P 500 moved higher.

Gainers were outpacing losers by a 5-to-1 ratio on the New York Stock Exchange and a 3-to-1 ratio on the Nasdaq.

Shares of Microsoft closed up nearly 3% after the software giant unveiled a new tablet product called Surface.

McDonald's ( MCD) , Hewlett-Packard ( HPQ), AT&T ( T), and Wal-Mart Stores ( WMT) were among the blue chips losing ground.

JPMorgan Chase ( JPM) shares got a 2.2% boost after CEO Jamie Dimon made his second appearance on Capitol Hill in the past two weeks, appearing before a House committee to discuss the bank's controversial trading loss. One revelation was that Dimon's own pay is on the table for a claw-back with the final decision resting with JPMorgan's board.

Eurozone members of the Group of 20 major economies are declaring their commitment to "take all necessary policy measures" to ensure that the euro stays intact and to bolster confidence, according to reports of a draft communiqué from the G20 summit in Mexico.

Meantime, anticipation about the outcome of the Fed's meeting was bolstering buyers. At the very least, the language of the resulting policy statement is expected to shift toward a greater willingness to provide additional stimulus. An extension of Operation Twist, the current bond-buying program that involves selling Treasuries with approaching maturities to buy long-term ones, looks to be what the bulls are counting on though.

"Our long-held view, initiated last October, is that the Fed will launch QE3 by early fall," said Michael Hanson, senior U.S. economist at Bank of America. "That remains our view today. We also now think that the Fed will not start hiking interest rates until mid-2015 at the earliest. We see roughly a 1-in-3 chance of a significant policy easing at the June FOMC meeting."

Hanson thinks the Fed statement on Wednesday after its meeting will be "quite dovish" and would not be surprised to see stronger language around policy; "perhaps replacing 'stands ready' to adjust its balance sheet for the 'is prepared' that it has used since June 2011."

When the updated projections are released, Hanson expects downward revisions to the Fed's above-consensus gross domestic product growth forecasts and a wider range of views as "the doves" raise their unemployment rate projections and lower their inflation expectations.

Alan Gayle, senior investment strategist at RidgeWorth Investments, says that with rates already so low, the benefits of further Fed action are likely to be limited.

"If interest rates go to 1.4% on the 10-year, how incrementally stimulative do we think the Federal Reserve's actions will be?," asked Gayle. "Will that make a difference on whether someone buys a house? Not very much."

The FTSE in London closed up 1.73% and the DAX in Germany settled up 1.84%. Hong Kong's Hang Seng index finished flat and Japan's Nikkei average settled lower by 0.75%.

The benchmark 10-year Treasury fell 12/32, raising the yield to 1.620%, while the dollar was down 0.66%, according to the dollar index.

August crude oil futures settled up 80 cents at $84.07 a barrel. August gold futures settled down $3.80 at $1,623.20 an ounce.

The Commerce Department reported Tuesday that housing starts fell 4.8% to a seasonally adjusted annual rate of 708,000 in May, from an upwardly revised April estimate of 744,000. The 744,000 figure was the best data on this indicator dating back to 2007.

Economists surveyed by Thomson Reuters had expected a 720,000 annual pace for May.

Building permits rose 7.9% to a seasonally adjusted annual rate of 780,000 from an upwardly revised 723,000. Economists had projected an annual rate of 728,000 for May.

Permits, which lead starts, are now at their highest level since September 2008.

"Starts are set, therefore, to rise strongly over the next month or two," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "These numbers are consistent with the strength in the monthly homebuilder survey from the NAHB, which also points to serious gains in new home sales through the summer."

The National Association of Home Builders reported Monday that its Housing Market Index rose to 29 for June from a revised May reading of 28, reaching its highest since May 2007.

"We look in particular at the traffic component," David James, senior vice president and portfolio manager of the James Advantage Funds said of the index. "In five of last six months, we've seen readings there in the 20s. That usually means we're going to get stable home prices ahead."

In corporate news,

FedEx ( FDX) beat fourth-quarter estimates but could not entirely shake the impact of declining package volumes from Asia. It guided toward lower-than-expected results for the current quarter with full-year earnings forecast to come in at the high end of estimates.

Shares close up 2.82% to $91.01.

Oracle ( ORCL) released its fourth-quarter report early and soared past estimates as new software licenses surged 7% to $4 billion.

The software company also added a hefty $10 billion to its existing buyback program. Shares rose 3.1% to $27.96.

Walgreen ( WAG) said Tuesday it is buying a 45% stake in Alliance Boots for $6.7 billion.

Walgreen also has the option to buy the remainder of Alliance Boots, the European health and beauty retailer.

Shares lost nearly 6% to finish at $30.09.

J.C. Penney ( JCP) on Monday announced the abrupt departure of Michael Francis as president after just eight months with the retailer.

A reason for Francis' resignation from J.C. Penney, which is undergoing a revamp that hasn't gone well, wasn't disclosed.

A press release said CEO Ron Johnson would assume "direct responsibility and oversight of the company's marketing and merchandising functions."

The stock fell 9% to close at $22.25.


-- Written by Andrea Tse and Alexandra Zendrian in New York.

>To contact the writer of this article, click here: Andrea Tse.