While the U.S. stock markets initially fell sharply following the announcement of the Federal Reserve's latest decision on interest rates on Wednesday, the major averages bounced back to the upside shortly afterward, ending the session firmly in positive territory. The downward move after the announcement came as the Federal Reserve lowered rates by a quarter point as expected but made some comments indicating that it is not likely to lower rates again in the near future. Commenting on the Fed's accompanying statement, Peter Boockvar, an equity strategist at Miller Tabak & Co. said, "Bottom line, the December rate cut is not likely to happen based on this statement." Nonetheless, the rebound by stocks lifted the major averages to new highs for the session, with the Dow climbing back within striking distance of the 14,000 level. The major averages ended the session off their best levels of the day, but they held onto strong gains. The Dow ended the session with a triple-digit gain, closing up 137.54 or 1 percent at 13,930.01. The tech-heavy Nasdaq closed up 42.41 or 1.5 percent at a six-year closing high of 2,859.12, while the S&P 500 closed up 18.36 or 1.2 percent at 1,549.38. Fed Decision As mentioned above, the Federal Reserve announced its widely expected decision to lower its target for the federal funds rate by 25 basis points to 4.50 percent. The rate cut comes after the Fed lowered rates by 50 basis points last month. However, the accompanying statement showed that the vote to lower rates was not unanimous, with Kansas City Fed President Thomas M. Hoenig preferring to leave rates unchanged. The Fed also said that strains in financial markets have eased somewhat, although it noted that the pace of economic growth is likely to slow in the near term due in part to the intensification of the housing correction. Additionally, the Fed noted that while core inflation readings have improved modestly this year, rising energy and commodity prices have the potential to put renewed upward pressure on inflation. The Fed subsequently said that it believes some inflation risks remain. The Fed added that following the interest rate cuts in the past two months, it now believes that the upside risks to inflation roughly balance the downside risks to growth. Sector News After seeing considerable weakness in the previous session, resource stocks moved back to the upside during trading on Wednesday. The recovery came as commodities prices rebounded after coming under pressure in the previous session. Gold stocks posted some particularly strong gains, contributing to a 3.8 percent gain by the Amex Gold Bugs Index. With the gain, the index more than offset the loss that it posted in the previous session, ending the day at a record closing high. The strength among gold stocks came amid an increase by the price of the precious metal, with gold for December delivery closing up $7.50 at $795.30 an ounce. In after-hours trading, the price of gold briefly rose above the $800 an ounce level. The price of oil also moved sharply higher on Friday, resulting in considerable strength among energy stocks. After seeing some early weakness, crude for December delivery closed up $4.15 at $94.53 a barrel, a new record closing high. The turnaround by the price of oil came after a report from the Energy Department showed that crude oil inventories in the week ended October 26 fell by 3.9 million barrels compared to the previous week. Analysts had expected crude oil inventories to increase by about 300,000 barrels. Interest rate sensitive real estate and utilities stocks also posted strong gains even though most analysts interpreted the Fed's statement as an indication that the central bank is likely to leave interest rates unchanged in December. Considerable strength was also visible in a variety of other sectors, with some chemical, wireless, and internet stocks posting notable gains. Meanwhile, airline stocks bucked the upward trend as a result of the sharp rise by the price of oil. Dow Components A vast majority of the Dow components ended Wednesday's trading in positive territory, contributing to the strong gain posted by the blue chip index. Microsoft (MSFT) turned in one of the Dow's best performances, adding to the strong gain that it posted in the previous session. Shares of Microsoft closed up 3.5 percent, as traders continued to react positively to the software giant's better than expected first quarter results. With the gain, Microsoft ended the session at its best closing level in well over six years. The Dow also benefited from strong gains by DuPont (DD), Intel (INTC), and General Motors (GM). Shares of DuPont ended the session up 2.7 percent after ending the previous session down 1.6 percent. Meanwhile, Citigroup (C) and Wal-Mart (WMT) were the only Dow components that ended the trading day in negative territory. Economic News While it did not attract that much attention ahead of the Fed announcement, a slew of economic data was released on Wednesday, including a report from the Commerce Department report showing stronger than expected GDP growth in the third quarter. The report showed that GDP rose at an annual rate of 3.9 percent in the third quarter, a modest acceleration from the 3.8 percent rate of growth seen in the second quarter. Economists had expected a more modest pace of growth of about 3.1 percent. Joel Naroff, chief economist at Naroff Economic Advisors said, "This may have been the summer of the housing market's discontent but it clearly wasn't for the rest of the economy." The stronger than expected growth was due in large part to an acceleration in the pace of consumer spending growth, which jumped to 3.0 percent in the third quarter from 1.4 percent in the previous quarter. Separate reports showed strong private sector employment growth as well as an unexpected increase in construction spending. However, a report from the National Association of Purchasing Managers - Chicago showed a contraction in manufacturing activity in the Chicago area. Other Markets Most of the major Asian markets closed higher on Wednesday, although the Hong Kong market bucked the upward trend. Japan's Nikkei 225 average closed up 0.5 percent after the Bank of Japan voted to leave interest rates unchanged at 0.50 percent. The European markets also turned in a strong performance, with financial stocks leading the way higher following some upbeat comments from Deutsche Bank. The U.K.'s FTSE 100 Index closed up 0.9 percent, more than offsetting the loss that it posted on Tuesday. Meanwhile, the treasury market fell sharply following the announcement of the Federal Reserve's latest decision on interest rates, sending yields sharply higher. The benchmark 10-year treasury yield closed up 9 basis points at 4.473 percent. Looking forward In the aftermath of the Fed's interest rate decision, economic data is likely to attract some attention on Thursday, with reports on personal income and spending, national manufacturing activity, and pending home sales among those that are due to be released. Earnings are also likely to remain in focus, with Exxon Mobil (XOM), Sprint Nextel (S), Eastman Kodak (EK), Dominion Resources (D), CBS (CBS), CVS Caremark (CVS), Electronic Arts (ERTS), and Marathon Oil (MRO) among the companies releasing their results on Thursday. Nonetheless, traders may look past Thursday's news to the Labor Department's October employment report due to be released on Friday. Economists currently expect the report to show an increase of about 80,000 jobs.
October 31, 2007 4:28 PM