Stocks Shoot Higher after Rate Cut

Investors cheered the Fed's decision to go with a more-aggressive 50 basis-point easing

Stocks recovered from earlier losses to finish solidly higher on Tuesday after Federal Reserve policymakers slashed interest rates for the tenth time this year -- the third time since the September 11 attacks -- in an effort to boost the sagging U.S. economy. Fed officials also left the door open for more cuts in December.

The Federal Open Market Committee lowered its target for the federal funds rate by 50 basis points to 2.0% -- the lowest level in some 40 years. The move was widely expeceted on Wall Street, though market players were split as to whether the Fed would cut by 25 or 50 basis points.

In a related action, the Fed's Board of Governors approved a 50 basis point reduction in the discount rate to 1.5%.

In a statement that accompanied the rate move, the Fed said "heightened uncertainty and concerns about a deterioration in business conditions" were damping economic activity in the in the U.S. and abroad. The Fed sees risks "weighted mainly toward conditions that may generate economic weakness."

The easing and commentary indicate the Fed still is very concerned about the fragile economy -- negative news, certainly. But the Fed moves also were interpreted on a technical level as good news for stocks, because investors' expectations for equity returns now will be gauged at a much lower bar, given the rock-bottom interest-rate environment, says A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara, Calif. "Stocks are not responding to the hope about the future, but the changes in the pricing of the earnings," Moore explains. Also boosting sentiment were expectations the lower rates will revive the economy.

Indeed, the rally Tuesday doesn't diminish recent negative economic data including a report on the depressed manufacturing sector. Some on Wall Street are beginning to wonder if an anticipated recovery in the second half of 2002 may now be pushed back further given the Fed's aggressive easing and comments. "This indicates that the Fed is not convinced the recovery may be six months down the road, or eight months down the road," says Peter Cardillo, chief strategist at Westfalia Investments.

There was plenty of corporate news for investors to chew on Tuesday. Among the stocks in the news, shares of Cisco Systems (CSCO ) ended with slight gains. After the closing bell on Monday, the maker of computer networking gear announced pro forma earnings per share of $0.04 (excluding various charges), which came in ahead of the Wall Street consensus estimate of $0.02. Revenue topped analysts' expectations at $4.2 billion. The news helped support tech shares on Tuesday.

Meanwhile, shares of software titan Microsoft (MSFT ) rose despite press reports the company's attorneys were "skeptical" about reaching an antitrust settlement with the government, according to wire reports. The 18 states involved in the case were reportedly split on whether to back a proposed settlement.

Also in technology, shares of Hewlett-Packard (HWP ) soared after the company said it's committed to its planned merger with Compaq Computer (CPQ ). Hewlett-Packard added it expects shareholders to support the despite plans by the Hewlett family to vote against the merger.

And in the energy sector, shares of Enron (ENE ) closed under $10 amid on-going conerns about liquidity, and complex financial transactions involving a former CFO, and whether or not those dealings properly were disclosed. The SEC is conducting an investigation into the matter. Meantime, the price of benchmark Brent crude fell below $19 a barrel, the lowest level since July 1999, amid sluggish demand and high inventories.

The Dow Jones industrial average closed up 149.33 points, or 1.58%, to 9,950.36. The tech-heavy Nasdaq composite index was up 41.44 points, or 2.31%, to 1,835.09. The broader S&P 500 index gained 15.90 points, or 1.44%, to 1,118.74.

Treasury Market

Shorter-dated Treasuries cheered the Fed's action and the yield on the two-year note fell nearly 16 bais points Tuesday. (Bond yields and prices move in opposite directions.) On the long end of the yield curve, the 30-year bond gave up its earlier gains to finish little changed.

World Markets

European markets ended mixed. In London, the Financial Times-Stock Exchange 100 index added 5 points, or 0.10%, to 5,214.10. In France, the CAC 40 lost 23.65 points, or 0.53%, to 4,461.69. In Germany, the DAX Index was down 47.46 points, or 1%, to 4,707.65.

Asian markets also closed mixed. Japan's Nikkei climbed 186.18 points, or 1.72%, to 10,633.72. In Hong Kong, the Hang Seng gained 74.67 points, or 0.72%, to 10,356.05.

By Heesun Wee in New York

Before it's here, it's on the Bloomberg Terminal.