Wall Street ended the first half of 2004 with a moderate advance Wednesday, as the Federal Reserve’s widely expected interest rate hike allowed investors to put weeks of uncertainty about rates behind them.
The markets’ reaction to the Fed’s move — which raises the benchmark lending rate by 0.25 percentage point — was somewhat muted, as the hike was exactly what investors had anticipated. The increase, bringing rates off their 45-year low of 1 percent to 1.25 percent, was the first in four years.
Although the market worried about the size of the increase, and the Fed’s accompanying policy statement, there were few surprises in the end. The Fed promised to continue a “measured pace” of rate increases to combat inflation. And while it acknowledged there is a somewhat higher risk of inflation, the statement added that some of the inflation factors were transitory and that the risks were balanced.
“This has certainly been a very well telegraphed change in direction,” said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. “It was an expected increase and a very balanced statement, both designed to keep the market confident in the Fed’s ability to manage the economy.”
At the close, the Dow Jones industrial average was up 22.05 points, or 0.2 percent, at 10,435.48, while the broader Standard & Poor’s 500-stock index was up 4.64 points, or 0.4 percent, at 1,140.84. The tech-rich Nasdaq composite index was up 12.86 points, or 0.6 percent, at 2,047.79.
Wednesday marked the halfway point of 2004, as well as the end of the second quarter. So far this year, the Dow is off 0.2 percent, but the S&P 500 has gained 2.6 percent and the Nasdaq has climbed 2.2 percent. All three major indexes were up for the quarter as well as the month of June.
Most investors and analysts believe the Fed’s rate hike is the first of many, with another 0.25 percentage point increase possibly coming as early as the next Fed meeting in August. But with rates historically low to begin with, the cost of borrowing will still be very good for corporate America and won’t unduly affect earnings.
“We’re now in a rising rate environment, and will be for some time. I think the equity markets realize that, and that’s already built into the curve,” said Josh Feinman, chief economist for Deutche Asset Management. “The question is, do rates go up fast or slow, more or less? It’s the trajectory, timing and the ultimate magnitude that we’ll have to watch out for.”
Feinman said the Fed should be able to keep to its promise of a “measured pace” of rate hikes, just as long as the economy’s growth is moderate.
Before the Fed announcement, stocks were sluggish as investors hedged their bets against a Fed surprise that never materialized. Investors are now looking ahead to the key Labor Department report on employment on Friday, as well as July’s second-quarter earnings reports.
“The anticipation of this rate hike has been far worse than the reality of it,” said Brian Bush, director of equity research at Stephens Inc. “I think it’s going to be a positive for the market to get past today’s announcement so we can start looking at earnings pre-announcements and the underlying economic data.”
In a preview of what the second-quarter results might look like, a number of companies reported better-than-expected earnings late Tuesday and Wednesday before the session. Cereal and packaged foods producer General Mills Inc. gained $1.41 to $47.53 after posting earnings that beat Wall Street expectations by 2 cents per share.
Agriculture and biotech firm Monsanto Co. posted a 45 percent gain in quarterly earnings, which were 3 cents over analysts’ estimates. Monsanto rose $1.30 to $38.50.
Research In Motion Ltd., makers of the popular Blackberry e-mail pager, surged $9.07, or 15 percent, to $68.45 after it beat estimates by 4 cents per share due to better-than-expected gross margins.
Mortgage giant Freddie Mac saw its quarterly earnings fall 52 percent from a year ago due to interest rate volatility, but analysts were cheered by the company’s ability to manage risk. Freddie Mac gained 11 cents to $63.30.
Advancing issues outnumbered decliners by more than 5 to 2 on the New York Stock Exchange, where volume was light. The Russell 2000 index of smaller companies closed up 3.68 points, or 0.6 percent, at 591.51.
Overseas, Japan’s Nikkei stock average ended the session flat. In Europe, Britain’s FTSE 100 closed down 1.1 percent, France’s CAC-40 fell 0.6 percent for the session and Germany’s DAX index dropped 0.4 percent.