U.S. stocks rose, capping the biggest rally in more than two years for benchmark indexes, as the Federal Reserve said it was prepared to use a range of tools to bolster the economy following yesterday’s rout in equities.
The Standard & Poor’s 500 Index swung between gains and losses following the Fed’s statement and closed near the highest level of the trading day. Financial stocks in the S&P 500, which paced a slide that erased $1 trillion in market value yesterday, rallied 8.2 percent. Bank of America Corp. and Citigroup Inc. jumped at least 13 percent. Freeport-McMoRan Copper & Gold Inc. gained 7.5 percent as gold advanced to a record.
The S&P 500 jumped 4.7 percent to 1,172.53 at 4 p.m. in New York, after falling as much as 1.6 percent. The Dow Jones Industrial Average rose 429.92 points, or 4 percent, to 11,239.77 today. Both gauges had the biggest gain since March 23, 2009. About 16.8 billion shares changed hands at 4:56 p.m., more than twice the three-month average, Bloomberg data show.
“The Fed is on top of the game,” Michael Holland, chairman and founder of New York-based Holland & Co., said in a telephone interview. His firm oversees more than $4 billion. “For people who are serious about the business and about the economy, I believe that the Fed fulfilled what they wanted to hear. It’s premature to say that they are prepared for an imminent stimulus, but it’s not early to say that they are becoming more likely to do something of significance.”
Benchmark indexes had their biggest slump since December 2008 yesterday amid concern that a reduction of the U.S. credit rating by S&P could worsen an economic slowdown. The S&P 500 was down 14 percent from this year’s high on April 29 through today.
Treasuries rose, pushing 10 and two-year note yields to all-time lows, after Federal Reserve officials promised to keep benchmark interest rates at record lows at least through mid-2013 in a bid to revive economic growth. The Federal Open Market Committee also discussed a range of policy tools to bolster the economy and said it is “prepared to employ these tools as appropriate,” it said in a statement. Three members of the FOMC dissented, preferring to maintain the pledge to keep rates low for an “extended period” without a specific timeframe.
“What the market is trying to digest here is that low interest rates are typically good, but the reason interest rates are low is that the economy is bad,” Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp., which has $1.66 trillion in client assets, said in a telephone interview. “Stock valuations are better than they were a week ago and we find them relatively attractive in a low interest-rate environment. The economy is still growing, albeit slowly.”
The S&P 500 has wiped out almost $3 trillion in market value since July 22, as a political battle over the U.S. debt ceiling prompted S&P to cut the country’s debt rating. The benchmark gauge for American equities dropped 6.7 percent yesterday and traded at 12.3 times reported earnings, the lowest valuation since March 2009.
Billionaire investor Wilbur Ross said he’s buying assets as the losses in global markets are being driven by fear rather than economic reality.
“Has the world really gotten 10, 12, 15 percent worse in the last 48 hours? I don’t think so,” Ross, who leads WL Ross & Co., said in an interview with Bloomberg Television. “Buying stocks at today’s prices over a couple of years’ time period will prove to be a uniquely rewarding experience.”
The benchmark index for U.S. stock options tumbled, following yesterday’s biggest surge since February 2007. The VIX, as the Chicago Board Options Exchange Volatility Index is known, slumped 27 percent to 35.06. The index measures the cost of using options as insurance against declines in the S&P 500.
Financial and raw-material companies, which paced the declines in the S&P 500 yesterday, were the best performers today, rising at least 5.9 percent. Companies which are least-tied to the economy, including consumer staples providers and utilities, rose less than the S&P 500 today.
The KBW Bank Index rallied 7 percent as all of its 24 stocks rose. Bank of America, the largest U.S. lender by assets, gained 17 percent to $7.60, after erasing 20 percent yesterday. Citigroup added 14 percent to $31.82.
The two banks led yesterday’s 11 percent decline in the KBW index after S&P’s downgrade cast doubt on federal backing for U.S. lenders. Bank of America’s $33 billion plunge in market value over the past week has stoked concern that Chief Executive Officer Brian T. Moynihan needs to raise capital even as his options for finding it narrow by the day.
Raw-material producers in the S&P 500 jumped as gold advanced to a record and copper rebounded from an eight-month low. Freeport-McMoRan, the world’s largest publicly traded copper producer, climbed 7.5 percent to $45.05. Alcoa Inc., the largest U.S. aluminum producer, added 8 percent to $12.24.
Ford Motor Co. gained 9.9 percent to $10.91 after Bank of America added the automaker to its “U.S. 1” list, which represents a collection of the firm’s “best investment ideas.”
Pfizer Inc. advanced 5.6 percent to $17.60. The world’s biggest drugmaker was also added to Bank of America’s “U.S. 1” list. Separately, Goldman Sachs Group Inc. added Pfizer to its “Conviction Buy” list.
Warren Buffett’s Berkshire Hathaway Inc. was raised to “overweight” from “equal weight,” by Barclays Plc after the company’s stock fell yesterday to its lowest since January 2010. Berkshire Hathaway Class B shares added 9.4 percent to $72.93.
AOL Inc., the Internet company that purchased the Huffington Post in March, tumbled 26 percent to $11.19, its lowest level since its spinoff from Time Warner Inc. in 2009. AOL reported a second-quarter loss as rising global advertising sales failed to overcome the continuing decline in subscriptions to Web access.
Laszlo Birinyi, one of the first investors to recommend buying when the bull market began in 2009, said the S&P 500 will continue its ascent, though possibly not to the level he had predicted. Birinyi said there’s no fundamental reason for the slide, and equities will continue the rally that took the S&P 500 Index 73 percent higher since March 2009.
“The bull market is intact, and while our ‘target’ of 1,450 in mid-2012 is admittedly a bit shaky, our more important conclusion that a rational, disciplined portfolio can attain a 10 percent plus return in 2011 is not,” Birinyi, of Westport, Connecticut-based research firm Birinyi Associates Inc., wrote in a note today.