Dow Jones surge after rate cut
Mar 19 2008 by Iain Laing, The Journal
WALL Street surged yesterday as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanised by the Federal Reserve’s decision to cut interest rates by three-quarters of a percentage point.
The Dow Jones industrial average soared 420 points, the largest point jump for the Dow since a 447-point advance on July 29, 2002.
Many investors were expecting the Fed to cut rates a full point, but appeared to overcome their early disappointment, especially since a 0.75 point cut is still substantial. The central bank’s benchmark fed funds rate is now at 2.25% – its lowest level since December 2004, and less than half what it was last summer.
In its statement accompanying the rate decision, the Fed said “recent information indicates that the outlook for economic activity has weakened further,” but also that “uncertainty about the inflation outlook has increased”.
“The Fed once again in the statement showed that it is ready for further action if this were needed,” said Christian Menegatti, lead analyst for online economic research firm RGE Monitor. “It also showed the fact that it’s still paying attention to inflation... but that it is far from being the primary concern right now. And the market knows that, and it is happy.”
Quarterly results from Lehman Brothers and Goldman Sachs Group early yesterday gave great comfort to a market fearful about investment banks weakening further due to losing bets on mortgage-backed securities.
After Sunday’s news that the stricken Bear Stearns was being bought by JPMorgan Chase & Co at a bargain price of $2 a share, both Lehman and Goldman posted quarterly profits early yesterday that were significantly lower than they were a year ago, but higher than analysts predicted.
“The overwhelming news this morning was the Lehman and Goldman Sachs earnings,” said Jim Herrick, director of equity trading at Baird & Co. “The earnings this morning allayed investors’ fears that there’s going to be a hard collapse.”
Broader stock indicators also finished sharply higher. The Standard & Poor’s 500 index rose 54.14, or 4.24%, at 1,330.74, and the Nasdaq composite index rose 91.25, or 4.19%, to 2,268.26.
Bond prices were mixed after the Fed rate cut. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.45% from 3.30% on Friday.
