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Stocks end session higher despite Fed warnings

Stocks carved solid gains Wednesday, closing up after reversing early losses as investors appeared to digest unpleasant signals about the economy with unusual equanimity.
/ Source: The Associated Press

Stocks came off early losses to finish higher Wednesday as investors seemed to absorb unpleasant signals about the economy with equanimity and draw comfort from the notion that the Federal Reserve didn’t appear overly concerned about inflation.

A rebound in hard-hit stocks of financial companies helped fuel the session’s turnaround, while an upbeat forecast from Hewlett Packard Co. pulled technology issues higher and record prices for oil gave a boost to energy stocks.

Stocks began the day lower amid concern about a rise in consumer prices and lackluster readings on home construction. But observers said the economic figures ultimately didn’t prove all that surprising given a recent run-up in oil prices and the well-documented woes of the housing sector.

Investors had already begun to check some of their concerns when minutes from the Fed’s meetings last month indicated the central bank didn’t seem to be extremely worried about inflation. The apparent lack of urgent concern that lower interest rates would foment a rise in prices was perhaps welcome given the latest readings on consumer prices and the rise in oil.

The absence of surprises from the Fed minutes underscored the notion that policyamkers will first address the flagging economy and worry later about inflation and allowed investors to perhaps snap up some bargains and focus on upbeat news.

Thomas J. Lee, equities analyst at JPMorgan said the Fed’s deliberations indicate the central bank could quickly step in to address inflation should that become necessary but that shoring up the economy would remain its immediate concern.

“It’s a very different Fed. It’s not a Greenspan Fed. Gradualism is out,” Lee said.

According to preliminary calculations, the Dow rose 90.04, or 0.73 percent, to 12,427.26.

Broader stock indicators also moved higher. The Standard & Poor’s 500 index advanced 11.25, or 0.83 percent, to 1,360.03, and the Nasdaq composite index rose 20.90, or 0.91 percent, to 2,327.10.

Bond prices fell Wednesday. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.89 percent from 3.87 percent late Tuesday. The dollar was higher against most major currencies, while gold prices fell.

Light, sweet crude oil on the New York Mercantile Exchange rose 73 cents to settle at a record $100.74 a barrel. Oil closed above $100 for the first time Tuesday, derailing a stock market rally and renewing Wall Street’s inflation concerns.

Economic news initially sent stocks lower Wednesday. The Labor Department reported a 0.4 percent increase in the consumer price index, and a 0.3 percent increase in the core consumer price index, which strips out often-volatile energy and food prices. The increases came in slightly higher than economists surveyed by Thomson Financial/IFR had anticipated.

Investors have at times shown concern that inflation could accelerate at the same time the economy suffers under tough credit conditions. The phenomenon of slowing growth and surging prices is known as stagflation.

The housing data for a time also weighed on investors. The Commerce Department reported that housing starts rose by 0.8 percent in January, but only after plunging by a downwardly revised 14.8 percent in December. Building permits, a more forward-looking indicator, fell by 3 percent.

By the afternoon, stocks turned positive after big names in the financial sector began to rebound and as H-P extended its advance.

“The earnings picture has actually been pretty good,” Lee said. “H-P had a solid beat, and pretty decent guidance.”

Hewlett-Packard late Tuesday posted a 38 percent surge in fiscal first-quarter profit following an increase in computer sales. The company, one of the 30 stocks that comprise the Dow Jones industrial average, raised its profit forecast for the year. H-P shares rose $3.49, or 7.9 percent, to $47.44.

Lehman Brothers Holdings Inc. rose $1.82, or 3.4 percent, to $55.39, while Morgan Stanley rose $2.06, or 5 percent, to $43.55 after hitting a fresh 52-week low in the session.

In other corporate news, the Financial Times reported that KKR Financial Holdings LLC, a listed affiliate of U.S. private equity group Kohlberg Kravis Roberts & Co., has delayed repayment of billions of dollars of commercial paper for the second time. Commercial paper are short-term bonds companies sell to quickly raise cash; demand for commercial paper began drying up last year, choking the credit markets.

KKR Financial fell 28 cents to $14.25.

Drug maker Pfizer Inc. said it would buy biopharmaceutical company Encysive Pharmaceuticals Inc. for about $195 million to strengthen its portfolio in products treating high blood pressure. Encysive surged $1.19, or 110 percent, to $2.27, while Pfizer rose 10 cents to $22.47.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.47 billion shares compared with 1.4 billion shares Tuesday.

The Russell 2000 index of smaller companies rose 7.68, or 1.09 percent, to 710.02.