msnbc.com news services
updated 10/25/2005 8:40:31 AM ET 2005-10-25T12:40:31

Wall Street rallied strongly Monday, chalking up one of its best performances in six months, in an apparent approval of President Bush’s nomination of top White House economist Ben Bernanke as the next Federal Reserve chairman. Strong earnings from the drug sector and lower oil prices contributed to the market’s gains.

Major Market Indices

Stocks were already advancing when the news came shortly after 11 a.m. ET that Bush would nominate Bernanke, chair of the president’s Council of Economic Advisers, to succeed Chairman Alan Greenspan when he retires in January.

Bernanke’s nomination bodes well for stocks because he has a solid reputation, a known track record and promises continuity for Fed policy said Scott McDonald, co-head of research at Aladdin Capital in Stamford, Conn.

Investors were relieved that Bush chose Bernanke, who was the clear favorite, and not someone unknown to markets. “He is well-respected, the market wanted him and he was somewhat anticipated,” he said.

President Bush officially announced the nomination of Bernanke, a Fed governor who became a top White House adviser last June, around 1 p.m. ET. The president’s choice was “an elimination of uncertainty — one element that helps,” said Paul Cherney of Cherney Market Analysis Inc. “I don’t know that it was a surprise to anybody.”

Richard Hoey, chief economist and chief investment strategist for Dreyfus Corp., said that under Bernanke the new issue will be whether the central bank officially targets an inflation rate — moving beyond the current practice of issuing a consensus forecast. However, “the main reaction will be a sigh of relief that he is one of the mainstream, qualified candidates,” Hoey said.

Bernanke’s nomination helped soothe a market that has grown increasingly nervous in recent weeks as record energy prices and emerging inflation threaten to clamp down on consumer spending and economic growth. The announcement removes a “great deal of uncertainty” that would have worsened if there were a prolonged period of questions about the future Fed chair, said Lynn Reaser, chief economist for Bank of America’s investment strategies group.

“He’s likely to continue to enhance the Fed’s move toward greater transparency,” Reaser said. “One change might be his advocacy of an explicit inflation target. But it should help credibility and confidence.”

The Dow Jones industrial average closed the day up 169.78 points, or 1.7 percent — its biggest one-day gain since April 21. The broader Standard & Poor’s 500-stock index rose 19.79 points or 1.7 percent and the Nasdaq composite index jumped 33.62 points or 1.6 percent.

Bonds were lower, pushing up market interest rates. An undercurrent of anxiety surrounding Bernanke's history as an inflation targeter was cited in the bond market, and traders and strategists said downward movement in prices was consistent with such worries. But some market sources dismissed the price movements, saying they reflected generalized jitters that would accompany any succession at the Fed.

Monday's rally got under way after upbeat profit reports at Merck & Co. and Schering-Plough Corp. eased drug industry concerns prompted by Pfizer Inc.’s weak forecast last week. Another boost came from crude oil, which dropped to near three-month lows as Hurricane Wilma spared key production and refining facilities in the Gulf of Mexico.

Merck, a Dow component, rose 82 cents to $27 after posting a 7 percent rise in profits due to lower production and materials costs. The company beat Wall Street earnings forecasts by 3 cents per share.

Rival Schering-Plough slid 2 cents to $21.13 although its profits tripled in the third quarter from strong product sales, including the allergy drug Nasonex. Schering-Plough surpassed analysts’ expectations by 2 cents per share.

Cendant Corp. said it will split itself into four separate publicly traded companies . One company will run the Ramada and Howard Johnson hotel chains, another will take over its Orbitz.com and other travel businesses, while the other two will operate its rental car and real estate units. The stock opened higher but closed down $1.32 at $18.77.

Wall Street firm Morgan Stanley announced plans to buy AMLI Residential Properties Trust, a real estate acquisition and management firm, for $2.1 billion, which includes assuming AMLI’s debt as well as $37.75 per share in cash. AMLI surged $6.25, or 20 percent, to $37.52, while Morgan Stanley rose $1.30 to $53.40.

Financial services firm American Express Co. reported its quarterly profit grew 17 percent on growth in its domestic and international card businesses. American Express rose $2.39 to $49.54.

Overseas, Japan’s Nikkei stock average fell 0.7 percent. In Europe, Britain’s FTSE 100 climbed 1.3 percent, Germany’s DAX index also gained 1.3 percent and France’s CAC-40 also added 1.3 percent.

Reuters and the Associated Press contributed to this report.

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