Wall Street built on its gains Wednesday as investors bet that the cheaper money the Federal Reserve unleashed with its decision to cut interest rates will give a boost to corporate profits and the overall economy.
The rise in stocks for a second day appeared to reassure some investors that Tuesday’s huge advance was based on reasonable optimism and amounted to more than a one-day pop. A mild reading of the Labor Department’s August consumer price index, which slipped 0.1 percent, offered support for the Fed’s decision to focus on the economy and set aside some of its concerns about inflation. Further, the Commerce Department’s report that new home construction fell for the third month in a row in August offered fresh evidence that the housing market is still struggling.
Wall Street, focusing on the Fed’s move to lower the target federal funds rate to 4.75 percent from 5.25 percent, was able to again look past a continued rise in energy prices. Oil settled at a fresh record Wednesday.
“They’re really trying to get ahead of this thing to make sure we don’t slip into a recession,” said Joe Vietri, vice president of active trading and investing at Charles Schwab & Co., referring to the Fed. “Certainly this is going to have a positive impact on corporate profits.”
The Dow Jones industrials rose 76.17, or 0.55 percent, to 13,815.56. While the Dow finished well off its highs of the session, the gains nevertheless came a day after a jump of nearly 336 points — its biggest one-day point gain in nearly five years.
Broader stock indicators also rose. The Standard & Poor’s 500 index rose 9.25, or 0.61 percent, to 1,529.03. The Nasdaq composite index rose 14.82, or 0.56 percent, to 2,666.48.
The recent gains leave the Dow only 1.3 percent below its closing high of 14,000.41 set two months ago. The S&P, which also saw a record close one July 19, is 1.6 percent below that level. The Nasdaq, down about 2 percent from mid-July, sits well below the levels it reached amid the dot-com bubble early in the decade.
Wall Street’s July high came before concerns about a weakening housing market and souring home loans began to dominate Wall Street.
The Russell 2000 index of smaller companies was a big advancer again Wednesday. The index rose 10.77, or 1.34 percent, to 817.40. Small-cap stocks had taken a hit in Wall Street’s recent retrenchment as investors often regard bigger companies as better able to weather an economic downturn because of substantial overseas operations and an ability to perhaps skate by on thinner profit margins.
Bonds ended sharply lower as investors transferred more money from fixed income investments to stocks. The yield on the benchmark 10-year Treasury note rising to 4.52 percent from 4.47 percent at Tuesday’s close.
Economic data supported a case for pushing stocks higher. The August consumer price index and the core CPI, which excludes often volatile food and energy prices, came in as expected. The core CPI advanced 0.2 percent.
And the Commerce Department reported that construction of new homes and apartments dipped last month by 2.6 percent to a seasonally adjusted annual rate of 1.331 million units, the slowest pace in 12 years.
In August, commodity prices fell along with stocks as investors drew their cash out of riskier assets and moved into safer government securities. However, crude oil prices are back at record highs, moving briefly above $82 per barrel. Light, sweet crude settled up 42 cents at $81.93 per barrel on the New York Mercantile Exchange. The record came a day after oil closed above $81 for the first time.
And in a trend that’s likely to exacerbate the effects of high commodities prices on U.S. consumers, the dollar slumped to a new low against the euro Wednesday. The dollar was mixed against other major currencies, while gold prices rose, extending the strong gains it made Tuesday.
“I would have thought that based on prior pattern we wouldn’t have seen this kind of follow through,” Vietri said of the market’s advance Wednesday.
However, he remains cautious. “I’m certainly not thinking that we’re in a long-term bull market here.”
“I think investors are in general thinking there’s a better chance of the economy improving than there was a week ago,” said J. Bryant Evans, a portfolio manager at Cozad Asset Management.
Evans said he’s concerned about inflation. “Down the road we might see this as helping the economy but it could also help inflationary pressures. That is the thing that the Fed is weighing: help the economy by reducing rates versus inflation.”
Enthusiasm from Tuesday’s rate cut extended in particular to industries related to financing. Mortgage lender Countrywide Financial Corp. rose 66 cents, or 3.3 percent, to $20.54 after its chief executive, Angelo Mozilo, late Tuesday issued a positive forecast for his company.
Morgan Stanley fell $1.48, or 2.2 percent, to $67.03 after the No. 2 U.S. investment bank said its third-quarter profit sank 17 percent as it was forced to write down nearly $1 billion in loans following the summer’s global credit upheaval.
Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 1.67 billion shares compared with 1.65 billion shares traded Tuesday.
European and Asian stocks surged following the Fed’s decision. Britain’s FTSE 100 finished up 2.81 percent, Germany’s DAX index rose 2.32 percent, and France’s CAC-40 rose 3.27 percent. Japan’s Nikkei index closed up 3.67 percent and Hong Kong’s Hang Seng Index rose 3.98 percent.