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By Tom Walker
Atlanta Journal-Constitution Staff Writer
Friday, June 30th, 2006
Wall Street saw inflation doves at the Federal Reserve on Thursday where they had seen hawks before and responded to the latest Fed interest rate increase with a roaring rally.
The Dow Jones industrial average surged 217 points after the Fed raised its overnight federal funds rate by a quarter-point to 5.25 percent. It was the Dow's biggest one-day gain since 235 points on March 21, 2003, near the beginning of the war in Iraq.
Just as impressive was the 63-point surge by the technology-weighted Nasdaq composite index, which posted its biggest one-day advance since July 29, 2002, before the last bear market had ended.
Thursday's reaction by investors was a far cry from the previous Fed meeting on May 10, which triggered a 142-point slide in stocks the day after the rate change and sent stocks into a monthlong sell-off that most strategists regard as a long-awaited market correction.
Wall Street had also blamed some subsequent speeches by Fed Chairman Ben Bernanke and other Fed governors and regional presidents for compounding stock market anxiety over the past month.
Thursday's rate increase was no surprise. But a slight rewording of the Fed's news release relating to future rate increases gave investors and traders hope that the cycle of anti-inflation rate boosts really is nearing an nd.
The Fed on Thursday also cited evidence of slower economic growth compared with the strong first-quarter expansion, as well as to "a gradual cooling of the housing market" and the delayed impact of higher interest rates and energy prices.
"They have put the brakes on the economy, and the [previous rate increases] have started to take effect," said Emily Sanders, president of Sanders Financial Management in Atlanta.
"The Fed did leave an out for themselves in terms of responding to economic data," Sanders added. "They indicated, to my mind at least, that they would like to stop, and would raise rates again only if economic data showed it is needed."
Investors have been especially concerned about the impact of slower economic growth on corporate profits, which some Wall Street institutions already see decelerating.
"Because of 17 interest rate increases, corporate earnings are going to level out some," Steve McCutcheon at SCM Associates Inc. in Carrollton said Thursday in a message to clients. "Gross domestic product growth is likely to fall into the less than 3 percent range for a while."
That would be a big comedown from first-quarter 2006 growth, which the government said Thursday was at a 5.6 percent annual rate. Analysts said first-quarter growth was mostly a rebound from the slow 1.7 percent fourth quarter of 2005, and is not sustainable at that level.
The prospect that Fed rate increases may soon end also buoyed the bond market, where buying had the effect of lowering longer-term Treasury yields.
The yield on the benchmark 10-year Treasury note fell to 5.20 percent from 5.25 percent on Wednesday.
Thursday's stock market rally was the strongest since June 13, which is the low point in the correction that began May 10. But blue chip stocks are still down about 4 percent from their highs for the year in early May, and technology and smaller stocks are down more than 8 percent even after the rebound. The indexes will also be in the red when the quarter ends today.
All 30 Dow stocks advanced on Thursday, however, with gains as large as 5 percent for McDonald's, 4.8 percent for Alcoa and better than 3 percent each for American Express, General Motors, Intel, JPMorgan Chase and United Technologies.
The Dow closed on Thursday at 11,190.80 with a gain of 217.24 points, or almost 2 percent.
The Standard & Poor's 500-stock index rose 26.87 points, or 2.2 percent, to 1,272.87, putting it back into plus territory for the year.
The Nasdaq composite surged 62.54 points, or almost 3 percent, to 2,174.38.
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