Stocks Rise on Fed Hopes
Stocks gained more ground on Monday, extending Friday's rally on expectations that the Federal Reserve will provide further relief to the struggling U.S. economy by cutting interest rates again on Oct. 31.
One of the day's highlights was awaiting official word from Merrill Lynch (MER) about CEO E. Stanley O'Neal, who was reportedly negotiating the terms of his forced departure in the wake of a multibillion-dollar write-off he announced last week. And crude oil prices spiked up to almost $94 a barrel.
On Monday, the Dow Jones industrial average rose 63.56 points, or 0.46%, to 13,870.26. The broader S&P 500 index was up 5.7 points, or 0.37%, to 1,540.98. The tech-heavy Nasdaq index added 13.25 points, or 0.47%, to 2,817.44.
Blue-chip issues and stocks tied to forest products, auto parts and investment banks were among the best performers. Bullish sentiment, however, was limited, as evident in lackluster volume and tepid market internals, notes S&P MarketScope. On the NYSE, breadth was 19-13 positive, while NASDAQ breadth was tied at 15-15.
Oil prices hit another new high. December NYMEX crude ended up $1.58 a barrel at $93.44, after touching a new all-time high of $93.80. Adding to ongoing buying pressure from speculators based partly on political tensions on the Turkey-Iraq border is a storm in the Gulf of Mexico that prompted state-owned Petroleos Mexicanos, the third-largest crude supplier to the U.S., to shut down about 600,000 barrels a day of output, or 20% of its production, according to Bloomberg News. Also helping to buoy oil prices: New lows in the U.S. dollar vs. the euro.
Many investors expect the Fed to lower interest rates by a quarter of a percentage point when its two-day meeting concludes on Wednesday. The main concerns are the continuing deterioration in the housing market and the subprime-sparked credit crunch will hamper economic growth. But Fed Chairman Ben Bernanke is reported to be resistant to the idea of cutting rates again, Action Economics said. Bernanke is most likely concerned about the heightened inflation risk with oil trading above $90 a barrel.
David Malpass, chief economist for Bear Stearns, said in a note Monday that he expects the Fed to lower rates by a quarter point on Halloween. "We think the U.S. slowdown and global credit market disruptions will pressure earnings, equity prices, commodities and foreign growth more than is reflected in the current consensus," Malpasss said. "We think consumption growth will slow to its weakest since the 1991 recession."
Looking ahead, Malpass thinks that headline inflation could go above 3.5%, with more possible due to gasoline price hikes, complicating prospects for a future rate cut. He also noted he is "increasingly concerned about dollar weakness."
The next batch of economic data comes out Tuesday, when the Conference Board's October index of consumer confidence is expected to hold fairly steady, after a roughly six-point declines in September and August. The better-monitored numbers will be the third-quarter GDP, Chicago Producer Price Index for October and September construction spending on Wednesday and October nonfarm payrolls on Friday.
Among stocks in the news Monday, Merrill Lynch & Co. (MER) CEO E. Stanley O'Neal is reportedly still negotiating the terms of his forced departure in the wake of a multibillion-dollar write-off he announced last week, the Wall Street Journal reported. Merrill's board is expected to consider external candidates and current Merrill executives in its search for a successor. O'Neal's resignation is expected to be announced as early as Monday. Standard & Poor's upheld its buy rating on the stock.
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