Stocks Finish with Solid Gains

Market sentiment was lifted by positive words on the economy from the Fed that accompanied its latest rate hike

Stocks finished higher Tuesday, as traders absorbed the Federal Reserve's updated economic outlook and its decision to raise its benchmark interest rate by a quarter-point. Markets also weighed a report showing growth in new housing starts in August.

The Dow Jones industrial average added 40.04 points, or 0.39%, to end at 10,244.93. The broader Standard & Poor's 500 index finished up 7.1 points, or 0.63%, to 1,129.3. The Nasdaq composite index added 13.1 points, or 0.68%, to 1,921.17.

The Fed announced a unanimous decision to raise the fed funds target rate by 25 basis points to 1.75%, saying its policy would remain "measured," and it would respond to changes in economic prospects as needed.

"After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly," according to the Fed's post-meeting statement. "Despite the rise in energy prices, inflation and inflation expectations have eased in recent months." Economic research firm Informa Global Markets notes that the "only downgrade appears to be to the labor market description."

Art Hogan, market strategist at Jefferies & Co., says that both the decision and the statement were exactly what was expected. "There was no take away from this," he says. As for reading the tea leaves to determine the Fed's next move at its Nov. 10 meeting? "Nothing signals that we get a pass in November."

Elsewhere in economic news, U.S. housing starts rose 0.6% in August to a 2 million annual pace, up from an upwardly-revised 1.98 million pace in July.

"The housing sector is looking considerably rosier than was thought till just now," notes economic research firm, Informa Global Markets. September housing starts may not be so rosy: permit issuances fell by 5.5% and hurricane damage is expected to slow new construction in the south.

Oil-related shares got a lift as oil prices rose on Tuesday. October crude finished up 75 cents at $47.10. On Wednesday, traders will hear inventory reports from the Department of Energy -- which is expected to report that crude oil stocks have fallen by five to eight million barrels -- and the American Petroleum Institute.

Topping corporate news, major brokerages Lehman Brothers (LEH ) and Goldman Sachs (GS ) delivered stronger-than-anticipated earnings Tuesday. Lehman Brothers reported third-quarter earnings per share of $1.71, vs. $1.81 one year earlier. Lehman shares ended 4.9% higher.

Meantime, Goldman shares gained 3.5% after delivering third-quarter EPS of $1.74 on a total revenue rise of 19%, vs. $1.32 one year earlier, but lower than the 2004 second quarter figure of $2.31. Net revenue in the firm's investment banking business grew 30% year-over-year. S&P upgraded the stock to buy from accumulate.

Software maker Adobe Systems (ADBE ) posted third-quarter earnings of 42 cents, vs. 27 cents (GAAP), on a 27% revenue rise. S&P reiterated its hold rating, but raised its estimates and target for Adobe. Adobe gained 5.2%.

Meantime, Red Hat (RHAT ) ended 12% lower after posting second-quarter earnings of 6 cents per share, vs. 2 cents, on a 60% revenue rise. First Albany reiterated its neutral rating of Red Hat, citing a weaker-than-expected revenue picture.

RF Micro Devices (RFMD ) cut its second-quarter GAAP EPS estimate to a loss ranging from 3 cents to 5 cents. The circuit maker says its quarterly revenue will decline sequentially by 8% to 12%, citing lower-than-anticipated sales to certain Asian handset customers. Shares closed 4.5% higher.

Housing stocks were higher in the wake of the strong August housing starts report, and positive news from KB Home (KBH ), which posted better-than-expected quarterly earnings on a sharp revenue rise. The stock gained 9.3%.

Lagging sectors are health care and consumer staples, notes Informa Global Markets, with the latter hurt on recent profit warnings from several consumer product outfits.

The rest of the week's earnings calendar remains dominated by big-name brokerage reports. Morgan Stanley (MWD ) and Bear Stearns (BSC ) are set for Wednesday. Other companies reporting earnings this week include FedEx (FDX ).

Treasury Market

U.S. Treasuries ended lower in price Tuesday, following the Fed decision. Prices initially slumped, but the Fed's upbeat language on inflation, and another hike expected by year-end helped bonds bounce from their lows, notes Informa Global Markets. The 10-year yield ended at 4.04%.

World Markets

European stock markets made gains on Tuesday, despite higher oil prices. London's Financial Times-Stock Exchange 100 index ended 28.9 points higher, or 0.63%, at 4,608.4. An industry report showed that Britain's house prices probably fell in August, reports Standard & Poor's MarketScope, adding speculation that the Bank of England will wrap up a series of interest rate hikes.

Supermarket chain Tesco was higher after reporting strong sales and 30% higher profit in the first half of the year, while rival Marks & Spencer says it expects lower same-store sales for the fourth quarter in a row.

Germany's DAX index finished up 13.34 points, or 0.34%, to 3,991.02. In Paris, the CAC 40 index gained 27.45 points, or 0.74%, to 3,731.14.

Asian markets finished mixed. Japan's stock market finished down 1.62 points, or 0.01%, to end at 11,080.87, following the holiday on Monday. Banks suffered overnight ahead of the expected interest rate hike in the U.S. on Tuesday.

In Hong Kong, the Hang Seng index added 83.15 points, or 0.63%, to 13,304.48.

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