Stocks finished with small to modest gains Tuesday as investors digested the statement from the Federal Reserve, which kept interest rates unchanged. Some bargain hunting and raised earnings guidance from 3M (MMM) and better than expected February-quarter numbers from Lehman Brothers (LEH) helped fuel gains in blue chips.
The Dow Jones industrial average rose 81.7 points, or 0.81%, to 10,184.67. The broader Standard & Poor's 500-stock index was up 6.21 points, or 0.56%, to 1,110.7. The tech-heavy Nasdaq composite index gained 3.89 points, or 0.2%, to 1,943.09.
As expected, the Federal Open Market Committee kept interest rates steady, leaving the key federal funds rate at a 46-year low of 1%. In its post-meeting statement, the FOMC said: "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation." It also said that the risks to sustainable growth over the next few quarters is roughly equal.
In addition, the FOMC included a comment on the employment picture: "Although job losses have slowed, new hiring has lagged." Economic research outfit Informa notes that FOMC's shift in language regarding the labor market is a pure statement of fact, characterizing the data just as Greenspan has in recent public statements - layoffs are down, but hiring isn't up.
In economic news Tuesday, February housing starts fell 4% to 1.85 million annual units, vs. January's 6.3% decline, weaker than expected. February building permits fell 1.5%, a bit weaker than estimates.
Economic data coming Wednesday include the consumer price index and real earnings. Economists expect the CPI to rise 0.3% in February, with the core rate (excludes food and energy prices) up 0.1%.
Earnings reports coming Wednesday include Darden Restaurants (DRI), Bear Stearns (BSC), FedEx (FDX), Vivendi (V), and Jabil (JBL).
Tuesday's slight rebound came after sharp losses in the previous session amid worries about increased terrorism risks. Further video tape evidence is linking Al Qaeda to the Madrid bombings, and traders fear the potential economic fallout in Europe.
From a technical standpoint, all the major indexes remain below their key 50-day moving averages although sentiment gauges as the VIX and put-call volume ratio suggest the market is becoming oversold near-term, says Informa Global Markets.
But it notes that investor risk aversion is up following the Madrid terror bombings, with rotation seen into cash and bonds and defensive equity sectors. "While the Nasdaq is now down 10% from its January high, a rally of 2% or more on higher volume is needed to signal big accounts are back on the accumulation side," says Informa.
The Dow average was supported by gains in component 3M, which raised its 80 cents to 82 cents first-quarter EPS guidance to 86 cents to 88 cents, saying it expects sales volume growth to be toward the higher end of its previously stated range of 5% to 8%. The maker of Post-It Notes, Scotch Tape, and other industrial products now forecasts $3.53 to $3.62 2004 EPS.
Lehman Brothers reported first-quarter EPS of $2.21, much higher than analysts' forecast and up from $1.15 a year ago, on 84% higher net revenue.
Other major companies that reported results Tuesday were General Mills (GIS), KB Homes (KBH), and Lennar (LEN).
One group notably higher was catalog retailers, after J Jill Group (JILL) raised its first-quarter EPS guidance to 2 cents to 4 cents on sales of $97 million to $99 million. J Jill cited "extremely" positive customer reaction to regular-price spring assortment. Banc of America also upgraded the stock to 'buy.'
However, transportation stocks fell after Swift Transportation (SWFT) said it sees first-quarter EPS "significantly" below 19 cents. It anticipates falling "significantly" below goal to reduce operating ratio by 3% this year.
In merger news, Community First Bankshares (CFBX) agreed to be acquired by BancWest Corp. for $32.25 per share, in a deal valued at $1.2 billion. Community First shares jumped on the news.
Metro-Goldwyn-Mayer (MGM) shares rose after the movie and television studio said it is exploring ways to share more wealth with stockholders, including a tender offer, stock buyback, or special dividend. CS First Boston upgraded the stock to neutral from underperform. S&P maintained a hold ranking.
Treasuries finished higher in price after a dovish FOMC statement. The FOMC was concerned about labor and not as upbeat on the economy as had been feared, says Informa Global Markets.
European stock markets finished with small gains Tuesday. London's Financial Times-Stock Exchange 100 index was up 16 points, or 0.36%, to 4,428.9 in some short covering and bargain hunting as the U.S. markets opened higher.
Germany's DAX index gained 11.61 points, or 0.3%, to 3,822.37 on bargain hunting, even though the ZEW Center's index of institutional investor and analyst sentiment plunged to 57.6 in March from 69.9 in February. Also, the BGA exporters' and wholesalers' group lowered its German GDP growth forecast to 1.2% from 1.5%.
In Paris, the CAC 40 index rose 14.2 points, or 0.4%, to 3,588.04.
Asian markets finished mixed on Tuesday. In Japan, the Nikkei 225 index lost 75.61 points, or 0.67%, to 11,242.29. Investors ditched Tokyo Electron and other large-cap tech shares in Japan amid growing concerns about global security. But the decline was limited due to buying in retail and property shares, with more bright signs appearing in consumer spending, a major engine for Japan's economy.
In Hong Kong, the Hang Seng index gained 13.21 points, or 0.1%, to 12,932.62, as the market traded in tight range as investment appetite was suppressed by growing concerns of global terrorist threats.