Stocks Rally after Fed Leaves Rates Alone

Buyers set aside worries about accounting practices and jumped back into the market after the Fed's decision

Stocks rallied late in Wednesday's session to end with substantial gains after the Federal Reserve said it would keep its benchmark overnight lending rate unchanged. The announcement helped to offset the recent selling pressure caused by worries over companies' aggressive accounting methods.

Immediately after the Fed's announcement, stocks drifted lower, but they managed a rebound last hour of trading. The Dow Jones industrial average shot up 144.62 points, or 1.50%, to 9,762.86. The Nasdaq Composite index gained 20.43 points, or 1.08%, to 1,913.42. The broader Standard & Poor's 500 index was higher by 12.59 points, or 1.14%, to 1,113.23.

The FOMC, the Fed's interest-rate setting arm, decided to keep its benchmark rate at 1.75%, ending a record run of 11 rate cuts since early January, 2001. The committee maintained its easing bias, keeping the door open for additional rate cuts if necessary. The decision signals that the central bank sees the U.S. in recovery mode.

The Fed continues to be cautiously optimistic. "The risks are mainly weighted toward conditions that could continue to generate economic weakness," the committee said in its policy statement. Alan Greenspan & Co. pointed to long-term prospects for productivity growth and "accommodative" monetary policy, saying "the outlook for economic recovery has become more promising."

"Now that the three-day waiting period for the Fed's decision is over, the market is looking to move forward, although it's uncertain which direction sentiment is headed," says Stephen Carl, principal and head of U.S. equity trading for The Williams Capital Group. "In the coming days investors will be looking more at earnings and less at economic data."

A slew of companies will report earnings Thursday including Procter & Gamble (PG ), Verizon Communications (VZ ), Calpine (CPN ) and Computer Sciences Corp. (CSC )

Worries about accounting practices in the wake of Enron's collapse caused a sharp sell-off on Tuesday and continued to pressure stocks for most of Wednesday. However, a late-day announcement from Tyco International (TYC ), one of the companies hit hard by accounting concerns, may help reverse some of the damage done in recent days. The stock made a comeback late in the day after Standard & Poor's issued a statement indicating that Tyco provided satisfactory answers to questions asked by the credit rating agency.

Investors also got better than expected data on the economy Wednesday. The preliminary read on gross domestic product was much stronger than expected, up 0.2%, driven by a surge of 9.2% in government spending and 5.4% in consumer spending (mostly on automobiles). Economists at S&P expect real GDP to fall 1.0% in the fourth quarter.

In company news, AOL Time Warner (AOL ) met analysts' expectations with its fourth quarter results. The Internet and media giant it expects revenue to remain flat in the current quarter vs. last year,and to increase 8% to 12% for all of 2002.

Among tech concerns, Veritas Software (VRTS ) reported better-than-expected operating profits, but its raised sales guidance for the first quarter and full year were not as aggressive as analysts expected.

Dow component AT&T (T ) helped pull the average lower after posting results that modestly beat the Wall Street consensus estimate. AT&T projected a "slight acceleration" in the rate of revenue decline for the first quarter from the previous quarter. It also said that it plans to issue an AT&T Consumer tracking stock this year.

Treasury Market

U.S. Treasuries finished lower after the Fed's widely anticipated decision to keep its target rate unchanged. Trading in the 5-year note remains choppy amid supply worries and interest rate factors, S&P MMS says.

U.S. fourth-quarter GDP rose 0.2% after a 1.3% decline in the third quarter. Consumer spending rose 5.4%, largely a function of heavy spending on motor vehicles and government spending surged 9.2%, but capital spending fell 12.8%. Meanwhile, companies liquidated inventories at a record $120.6 billion, which subtracted 2.2% from growth. MMS cautions, however, that all of these data are highly subject to revision. As is, the data suggest a stronger economy than had been expected, and the risk to the first quarter GDP outlook lies to the upside of current market estimates.

On Thursday, traders will mull December personal income data. MMS expects a rise of 0.4% and a drop in consumption of 0.3%. Figures in line with these expectations would suggest real consumption will top 4% in the fourth quarter, which would be much stronger than anyone expected following the September 11 attacks. While this release will be of interest, it will largely be overshadowed in the wake of GDP and ECI data.

World Markets

European markets ended lower on the heels of the sharp sell-off on the U.S. stock market Tuesday. In London, the Financial Times-Stock Exchange 100 index fell 42.10 points, or 0.82%, to 5,089.30. In France, the Paris CAC 40 slipped 68.83 points, or 1.54%, to 4,407.27. Germany's DAX index stumbled 32.32 points, or 0.64%, to 5,052.20, amid the European Commission's warning to Germany and Portugal to lower their budget deficits.

Asian markets ended lower. Japan's Nikkei 225 index fell 106.55 points, or 1.06%, to 9,919.48. Hong Kong's Hang Seng index dived 257.28 points, or 2.34%, to 10,756.96.

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