Stocks rebounded sharply Wednesday as investors, growing more optimistic about chances for an interest rate cut, sought bargains after the previous session’s huge tumble. The Dow Jones industrials gained almost 250 points.
Many investors believe the Federal Reserve will cut interest rates at its next meeting on Sept. 18 or even sooner and were preparing for Fed Chairman Ben Bernanke to hint at such a move on Friday at a speech in Jackson Hole, Wyo. The possibility of a rate cut has given Wall Street some hope that the stock market will recover from its summer volatility, and that right now, it’s a good strategy to buy while the buying is cheap.
News that Bernanke said in a letter to Sen. Charles Schumer, D-N.Y., that Fed policymakers are “prepared to act as needed” if the market’s turbulence hurts the economy helped pad the market’s gain.
Wall Street was also enthusiastic about signs of corporate muscle. A jump in oil prices fed a rally in energy company stocks, and positive news from technology companies including Seagate Technology gave that sector a boost. Meanwhile, Altria Group Inc. spun off its Philip Morris International cigarette business.
The Fed, although it has not yet indicated that it will indeed lower the benchmark fed funds rate, has been adding cash to the banking system in an attempt to keep the credit markets liquid. The Federal Reserve Bank of New York said Wednesday it would inject $5.25 billion through a one-day repurchase agreement, where it buys that amount in collateral from dealers who then deposit the money into commercial banks.
Stock investors kept an eye on the credit markets for signs of loosening. Though the safest assets, Treasurys, are not seeing the same frantic buying they saw a couple weeks ago, assets with a bit more risk, like commercial paper, are having some trouble attracting buyers.
“Everyone’s waiting for the dust to settle there,” said Steven Goldman, chief market strategist at Weeden & Co. “We’re on a little bit better footing, but we’re in a healing process that takes time.” He added that he regards a Fed rate cut as “mandatory.”
The Dow rose 247.44, or 1.90 percent, to 13,289.29, near its highs of the session. The blue chip index tumbled 280 points on Tuesday amid pessimism about the Fed’s intentions.
Broader stock indicators also jumped. The Standard & Poor’s 500 index added 31.40, or 2.19 percent, to 1,463.76, while the Nasdaq composite index gained 62.52, or 2.50 percent, to 2,563.16.
Bonds fell back as investors moved back into stocks. The yield on the benchmark 10-year Treasury note rose to 4.57 percent from 4.52 percent late Tuesday.
Light, sweet crude soared $1.76 to $73.49 a barrel on the New York Mercantile Exchange after the U.S. Energy Department reported larger-than-expected declines in gasoline and oil inventories.
One reason for Wednesday’s triple-digit rebound — with some 100 points gained in the final hour of trading alone — is that volume again is light, which tends to skew the market’s movements. Volume on the New York Stock Exchange, where advancing issues led decliners by about 5 to 1, came to 1.2 billion shares.up from 1.1 billion on Tuesday.
On Tuesday, the stock market gave back some of the robust gains it made last week as investors grew nervous again about the strength of the economy and whether the Fed will act in an effort to prevent credit troubles from spreading further.
Michael Sheldon, chief market strategist at Spencer Clarke, said he believes investors are positioning themselves ahead of Bernanke’s speech. He believes the rebound during the session shows that perhaps investors are becoming more confident the Fed will lower interest rates, and also that financial institutions exposure to distressed mortgages and loans.
“At least for a day, people feel like there is a light at the end of the tunnel,” he said. “The problems facing the big brokerage firms, while not great, are being seen as at least manageable.”
Bear Stearns Cos. fell $1.32 to $107.10, Lehman Brothers Holdings Inc. rose 15 cents to $54.43, and Goldman Sachs Group Inc. was up $2.77 at $173.72.
The technology sector was strong, helping to boost the Nasdaq, after several analysts raised their price targets on Seagate Technology in response to its improved fiscal first-quarter outlook. Seagate rose $1.04, or 4.2 percent, to $25.50.
The housing market outlook remains weak, though. Mortgage application volume, refinance volume and purchase volume all fell about 4 percent during the week ended Aug. 24 compared to the prior week, according to the Mortgage Bankers Association’s weekly application survey.
The Russell 2000 index of smaller companies rose 19.49, or 2.54 percent, to 787.32.
The dollar fell against other major currencies except the yen. Gold prices rose.