Wall Street rallied for a second straight session Tuesday after easing wage pressures and stronger-than-expected service sector activity raised prospects that the economy could cool gradually and leave room for the Federal Reserve to lower interest rates next year.
Investors applauded Labor Department figures showing wages and benefits increased at a much slower pace in the third quarter than had been estimated. Recent concerns about inflation have eroded some hopes that the Federal Reserve would start lowering interest rates next year. The central bank has said inflation remains its primary concern.
Meanwhile, the Institute for Supply Management, a trade group, found activity in the nation’s services sector rose at a faster rate in November, giving a further boost to investor sentiment. An index reading of 58.9 was above the 55.5 that had been expected and the 57.1 seen in October.
“Certainly that ISM number was a nice surprise to the upside but for me the numbers that were more important were the unit labor costs and the productivity number” from the Labor Department, said Scott Wren, senior equity strategist for A.G. Edwards & Sons. “You’re not getting as big a kicker off this data as you might have six month ago because the market is pretty fairly valued.”
The Dow Jones industrial average finished the day up 47.75 points, or 0.39 percent, finishing just short of its all-time closing high, while the broader Standard & Poor’s 500-stock index added 5.64 points, or 0.40 percent. The Nasdaq composite index finished the day up 3.99 points, or 0.16 percent.
Bonds slipped after release of the ISM figure. The yield on the benchmark 10-year Treasury note rose to 4.45 percent from 4.43 percent from late Monday. The dollar firmed against other major currencies, while gold prices fell. Light, sweet crude settled down 1 cent at $62.43 a barrel on the New York Mercantile Exchange.
The Labor Department report found costs of wages and benefits per unit of output increased at the annual rate of 2.3 percent in the third quarter, a hefty drop from the 3.8 percent rate the agency reported a month ago. Also, growth in worker productivity slowed to an annual rate of 0.2 percent, though the increase still topped an earlier estimate that had productivity as unchanged.
“I think more and more we’ve seen inflation start to roll over,” Wren said, noting many investors have been more recently concerned that growth would slow too quickly. He believes investors should remain cautious. “It is a little worrisome that more people aren’t calling for a recession out there because I hate to see when everyone is thinking the same way.”
Wren’s call for vigilance comes on the 10th anniversary of remarks by former Federal Reserve Chairman Alan Greenspan in which he famously asked how investors were to know when “irrational exuberance” had unduly escalated asset values.
In corporate news Tuesday, Direct General Corp., an insurance holding company, surged $3.99, or 24.2 percent, to $20.50 after agreeing to be acquired by a private equity group for about $432.4 million.
Toll Brothers Inc., advanced 96 cents, or 3 percent, to $32.87 despite posting a 44 percent drop in its fiscal fourth-quarter profit. The luxury homebuilder said it sees some signs of stabilization in the housing sector and raised its forecast for first-quarter home deliveries.
Kroger Co. rose $1.16, or 5.2 percent, to $23.49 after the supermarket chain posted a 16 percent increase in its third-quarter profit. The company also said earnings per share for the year would grow 8 percent to 10 percent, rather than 6 percent to 8 percent as it had forecast.
Cooper Tire & Rubber Co. rose $1.12, or 8.4 percent, to $14.46 after a Deutsche Bank analyst upgraded the stock, citing expectations of cost-cutting and an improving industry.
Sanderson Farms Inc., a poultry producer, posted a 4 percent increase in its fiscal fourth-quarter profit, in part due to insurance payments meant to cover losses related to Hurricane Katrina. The stock was advanced $3.44, or 11.8 percent, to $32.72.
Syntax-Brillian Corp. rose 74 cents, or 8.6 percent to $9.30 after the maker of high-definition TVs, said its fiscal second-quarter revenue would meet or exceed the high end of its forecast amid strong holiday sales.
Station Casinos Inc. fell $2.09, or 2.5 percent to $82.81 after several analysts lowered their ratings on the casino operator on a $4.7 billion buyout offer the company received Monday.
Overseas, Japan’s Nikkei stock average closed down 0.23 percent. Britain’s FTSE 100 gained 0.60 percent, Germany’s DAX index rose 1.23 percent and France’s CAC-40 added 1.20 percent.