Stocks Rise after Fed Sits Tight
Stocks finished Tuesday at session highs after a late-day bounce. The major indexes had been modestly higher both before and after the Federal Reserve said it would keep its interest rate policy unchanged.
The Federal Open Market Committee (FOMC) at its last meeting of the year kept the federal fund target rate at 1.25% and maintained its "neutral" risk assessment on the economy, not leaning toward cutting or raising rates. The committee's announcement was as economists had expected.
Before the late-day boost, stocks had modestly reversed some of the losses taken over the last several sessions. The Dow Jones industrial average added 100.85 points, or 1.19%, to 8,574.26. The tech-heavy Nasdaq composite gained 23.38 points, or 1.71%, to 1,390.52. And the broader S&P 500-stock index gained 12.42 points, or 1.39%, to 904.42.
"It's been a two-month run, so everyone wants to anticipate a year-end rally, but we've been off for the last seven sessions [before Tuesday]. So the question is will there be a year-end rally -- or did it already happen?," says Stephen Carl, principal and head of U.S. equity trading at the Williams Capital Group. Carl expects the stock market to remain under pressure for the rest of the year.
Some were hoping that the FOMC would say that a continued weak employment picture would lead it to cut interest rates in the near future. But no such implication was made. "There was little evidence to suggest in advance that the Fed would alter rates or the policy bias so soon after undertaking a remarkable insurance cut back in November. Indeed, the Fed held rates and the balanced bias unchanged, and offered mostly ambiguity for the markets to digest," says economic research group MMS International.
In its statement , the FOMC said: "The Committee continues to believe that this accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity." The limited data available since the November 6 meeting were "not inconsistent with the economy working its way through its current soft spot," the committee said.
"I'd have to agree with [the FOMC's] assessment, although last week's disappointing manufacturing and employment reports have put a damper on sentiment and aborted the 8-week rally in the U.S. stock market, at least temporarily," says Sherry Cooper, global economic strategist at BMO Financial Group. "Nevertheless, leading indicators are looking up." Cooper refers to data showing initial unemployment insurance claims have edged downward, and some positive signs among regional manufacturing indicators.
The committee is set to meet next on January 28 and 29. "The committee is likely to remain on the sidelines then as well, particularly given that the new Bush economic team will be aggressively lobbying for tax cuts to further stimulate the economy," Cooper says.
On Wednesday, investors will not get any significant economic data to mull. A report from the Commerce Dept. Thursday is expected to show that the aggregate monthly retail sales for November increased 0.6%, while the figure excluding cars is expected to rise 0.4%.
The corporate calendar is also light. On Wednesday Kimberly-Clark (KMB ) will hold a conference call. The paper giant will its business outlook for 2002 and 2003 beginning at 10 a.m. EST.
Earlier in Tuesday's session, President Bush nominated investment banker William Donaldson to head the Securities and Exchange Commission. The nomination was seen as a positive by the market. Donaldson co-founded the investment banking firm Donaldson Lufkin & Jenrette and was the firm's chairman and CEO. He has worked at health insurance giant Aetna, was the founder of Yale's undergraduate management program, and served as undersecretary of state with Henry Kissinger.
Technology stocks were the biggest gainers Tuesday, despite a warning from Nokia (NOK ). In its mid-quarter update Tuesday, the world's largest mobile phone maker warned that fourth-quarter sales would be weaker than expected as demand remained lackluster and sales of color-screen phones disappointed.
Defense company Northrop Grumman (NOC ) reached an agreement with the Justice Department that should give it the go-ahead to complete its merger with competitor TRW (TRW ).
In other acquisition-related news, General Motors division Hughes Electronics (GMH ) and EchoStar Communications Corp. (DISH ) have agreed to terminate the proposed merger of Hughes and EchoStar because it could not be completed within the timeframe set by the merger contract.
Treasury Market U.S. Treasuries ended Tuesday's session little changed to slightly higher, says MMS, following the FOMC's decision to leave key interest rates and policy unchanged. "The FOMC meeting provided absolutely no excitement for the markets, either in the run up to the announcement or in the post-statement trade," MMS says.
In economic data, U.S. wholesale trade data implied weakness in inventories in October that likely reflected port-disruptions on the West Coast. The data prompted a small downward adjustment in MMS' fourth-quarter GDP estimate to a 1.7% gain.
World Markets European markets finished mostly higher on strength in financial stocks though Nokia's disappointing sales put a lid on gains. In London, the Financial Times-Stock Exchange 100 index ended down 8.90 points, or 0.23%, to 3,925.00. In Germany, the DAX finished up 102.42 points, or 3.34%, to 3,167.99. In France, the CAC 40 Index finished up 27.12 points, or 0.87%, to 3,142.75. Asian markets finished down. In Japan, the Nikkei 225 index shed 23.53 points, or 0.27%, to close at 8,804.52. Lackluster sentiment in the U.S. market on Monday discouraged interest in high-tech stocks in Tokyo. Investors seemed to prefer defensive stocks such as pharmaceuticals and utilities. In Hong Kong, the benchmark Hang Seng index ended down 10.49 points, or 0.11%, to close at 9,857.99.