The Fed steps in, and stocks soar: Dow climbs 206

Spe­cial­ist Frank Babino, cen­ter, works at his post on the floor of the New York Stock Exchange Thurs­day. The Fed­eral Reserve unleashed a series of aggres­sive actions Thurs­day intended to stim­u­late the still-weak econ­omy by mak­ing it cheaper for con­sumers and busi­nesses to bor­row and spend. (AP Photo/Richard Drew)

BERNARD CONDON

AP Busi­ness Writer

NEW YORK — The stock mar­ket staged a huge rally Thurs­day after investors got the aggres­sive eco­nomic help they wanted from the Fed­eral Reserve.

The Dow Jones indus­trial aver­age spiked more than 200 points and cleared 13,500 for the first time since the begin­ning of the Great Reces­sion. The aver­age is within 625 points of its all-time high.

The Fed said it would buy $40 bil­lion of mort­gage secu­ri­ties a month until the econ­omy improves. It left open the pos­si­bil­i­ties of buy­ing other assets and of buy­ing long after the recov­ery picks up.

The cen­tral bank also extended its pledge of super-low short-term inter­est rates into 2015, and extended a pro­gram to drive down long-term rates.

It was the pack­age known as QE3 — a third round of quan­ti­ta­tive eas­ing, in market-speak. And it was just what investors were hop­ing for.

“They’re say­ing that the punch bowl, the fuel for the econ­omy, isn’t going away — it’s going to be here as long as you need it,” said Tony Fratto, a for­mer aide to Pres­i­dent George W. Bush and man­ag­ing part­ner at Hamil­ton Place Strate­gies, a pol­icy con­sult­ing firm in Washington.

The Dow closed up 206.51 points, the seventh-biggest gain this year, at 13,539.86, its high­est close since the last days of Decem­ber 2007, the first month of the recession.

The broader Stan­dard & Poor’s 500 index was up 23.43 points at 1,459.99, also its high­est since Decem­ber 2007. The Nas­daq com­pos­ite index, which has been trad­ing at its high­est lev­els since 2000, was up 41.52 at 3,155.83.

David Abuaf, chief invest­ment offi­cer at Hefty Wealth Part­ners, said he expects investors to keep shift­ing from safer assets like gov­ern­ment bonds to stocks. That could push stock prices higher and start a cycle of increased wealth and spending.

“Peo­ple will feel more con­fi­dent, con­sumers will buy more goods, and GDP growth will increase,” he said, refer­ring to the gross domes­tic prod­uct, or eco­nomic output.

The stock mar­ket had already enjoyed a sum­mer rally, in part because investors were bet­ting on more Fed action. The Dow has climbed more than 1,100 points since the start of June.

Still, stocks spiked Thurs­day in indus­tries across the econ­omy. Mate­ri­als com­pa­nies, which tend to do well when the econ­omy picks up, enjoyed the biggest gain — 2.6 per­cent as a group. Bank stocks also surged.

This is the third round of bond-buying by the Fed since the finan­cial cri­sis struck in the fall of 2008. The goal is to lower long-term inter­est rates, get peo­ple to bor­row and spend more and push investors into stocks.

If his­tory is any guide, stocks could rally a bit more. In the three months fol­low­ing March 2009, when the Fed said it would expand its first round of buy­ing, the S&P 500 rose 18 per­cent. In the three months after the cen­tral bank hinted at a sec­ond round of buy­ing in August 2010, the S&P rose 14 percent.

Some econ­o­mists and investors have warned that the bond-buying will have a lim­ited impact because inter­est rates are already near record lows.

Crit­ics of the stock rally say investors should focus on why the Fed is act­ing in the first place: The U.S. econ­omy is weak. Eco­nomic growth in China is also slow­ing, and much of Europe is in reces­sion and strug­gling with high debt.

Ear­lier this month, Mario Draghi, the head of the Euro­pean Cen­tral Bank, said the cen­tral bank would buy the debt of coun­tries that use the euro and are des­per­ate to keep their bor­row­ing costs down.

“I’m not buy­ing any­thing,” Gary Flam of Bel Air Invest­ment Advi­sors said as Fed Chair­man Ben Bernanke spoke at a press conference.

Flam added, refer­ring to Draghi and Bernanke: “These two guys are prop­ping up mar­ket in the hope it will trickle down to the econ­omy, but after sev­eral years of this we haven’t seen a sus­tain­able impact. The under­ly­ing prob­lems of debt and deficits remain.”

The Fed also low­ered its out­look for eco­nomic growth this year to no stronger than 2 per­cent. That’s down from its fore­cast of 2.4 per­cent in June.

In Trea­sury trad­ing, the yield on the bench­mark 10-year note fell slightly to 1.73 per­cent from 1.79 per­cent late Wednes­day. It had spiked to 1.84 per­cent as investors sold bonds after the Fed announcement.

The dol­lar fell slightly against major cur­ren­cies. It tum­bled almost a penny against the euro, which rose to a hair under $1.30.

The price of gold climbed to its high­est level since Feb­ru­ary — $1,772 an ounce, a gain of $38, or 2 per­cent. When the Fed buys bonds, gold often rises, both because investors fear infla­tion and because a weaker dol­lar makes gold more expensive.

The trad­ing day didn’t begin well. Euro­pean mar­kets were falling and U.S. futures slid, sug­gest­ing stocks might fall when U.S. mar­kets opened.

In addi­tion to wor­ries about what the Fed might do, investors were rat­tled by tur­moil in the Mid­dle East. Pro­test­ers stormed the U.S. Embassy com­pound in Yemen’s cap­i­tal ear­lier in the day, and there was vio­lence around the U.S. mis­sion in Cairo. The U.S. ambas­sador to Libya was killed Tuesday.

Stocks rose after the open but barely. Then the Fed released a state­ment about its moves shortly after 12:30 p.m., and prices began to climb steadily. Some Fed watch­ers homed in on a pledge to keep stim­u­lat­ing the econ­omy for a “con­sid­er­able” time “after” it appears to have strength­ened. That is stronger lan­guage than the cen­tral bank had used before.

Then Bernanke started speak­ing at the press con­fer­ence at around 2:15, and stocks shot up. A few min­utes into the con­fer­ence, the Dow was up nearly 240 points.

“We are look­ing for ongo­ing, sus­tained improve­ment in the labor mar­ket,” Bernanke told reporters. “There’s not a spe­cific num­ber in mind. But what we’ve seen in the last six months isn’t it.”

In other news Thurs­day, the Labor Depart­ment reported that the num­ber of peo­ple seek­ing unem­ploy­ment ben­e­fits jumped last week to the high­est level in two months, though the fig­ures were skewed in part by Hur­ri­cane Isaac.

The fig­ures come after a dis­ap­point­ing jobs report last week. Employ­ers added only 96,000 jobs in August, far below the aver­age 226,000 a month added in the January-March quarter.

The gov­ern­ment also said that whole­sale prices rose 1.7 per­cent in August, the most in three years. They were dri­ven up by higher costs for gas and food. Remov­ing the impact of energy and food, how­ever, the increase in prices has been mild.

Among stocks mak­ing moves, Pall Corp. rose $4.63, or 8 per­cent, to $62.80. The com­pany, which makes fil­tra­tion equip­ment, posted net income that beat Wall Street predictions.

Apple climbed $13.19, or 2 per­cent, to $682.98. On Wednes­day, the com­pany unveiled an iPhone with a big­ger screen and faster down­load speeds.

On Wednes­day, the Dow rose to a four-year high after Germany’s high­est court rejected calls to block the cre­ation of Europe’s res­cue fund for indebted governments.

The Fed action com­bined with the Mid­dle East tur­moil pushed crude prices up to above $98 a bar­rel of the first time in more than four months. Oil rose $1.30 to close at $98.31 on the New York Mer­can­tile Exchange.

There were nearly four stocks ris­ing for every one falling. Vol­ume was high, 4.5 bil­lion shares.

Posted by AP News on Sep 13 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.