An unprecedented step by the Federal Reserve to keep the interest rate near zero for another two years returned cheer to the markets as the Dow soared up by 429 points. The Street finally enjoyed one of its best days in two years a day after it was sent crashing following Standard & Poor’s downgrade of the US credit rating.
Recouping most of the losses suffered on Monday, the indices breathed a sigh of relief, gaining substantive points. The Dow Jones Industrial Average (DJIA) gained 429 points or 4% to sign off at 11,239.77. The Standard & Poor 500 (S&P 500) surged 4.7% to close at 1,172.53 and the Nasdaq Composite Index jumped 5.3% to settle at 2,482.52. The fear-gauge CBOE Volatility Index (VIX) plunged 25%. It was yet another active day for Wall Street as consolidated volumes on the New York Stock Exchange was almost 9 billion shares. On the NYSE, advancers beat decliners by a ratio of 12 to 1.
For the Dow, it was quite a roller-coaster ride throughout the day as it swung to and fro. In the opening session, the blue-chip index went up 200 points and then plunged more than 200 points following the Fed announcement. Finally, with not much time to spare, the Dow returned to the green and had gained comfortably. Further, none of the 30 Dow components ended in the red and the index recorded its tenth-highest point gain in history. The 429-point jump was also the biggest leap since March 2009.
Incidentally, most of the biggest gainers in the Dow were those who lost the largest amount of points on Monday. Leading the gains were Alcoa, Inc. (NYSE:AA), American Express Company (NYSE:AXP), Bank of America Corporation (NYSE:BAC), Caterpillar Inc. (NYSE:CAT), EI DuPont de Nemours & Co. (NYSE:DD), JPMorgan Chase & Co. (NYSE:JPM), 3M Co. (NYSE:MMM) and The Travelers Companies, Inc. (NYSE:TRV) and they surged by 8.0%, 7.1%, 16.7%, 5.9%, 6.0%, 6.9%, 5.2% and 6.4%, respectively.
Sectoral stocks followed a similar path as the biggest losers on Monday ended up being the biggest gainers yesterday. Financial stocks in the S&P 500 had plummeted 10% on Monday and jumped 8.2% on Tuesday. Bellwethers like The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), Wells Fargo & Company (NYSE:WFC), Citigroup, Inc. (NYSE:C) and American International Group, Inc. (NYSE:AIG) gained 4.3%, 6.4%, 8.1%, 13.6% and 6.2%, respectively.
Helping the indices partially wash out the losses incurred on Monday, the Fed announced: “The committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013″. Initially the announcements dragged the markets lower, but as investors interpreted the announcement as a positive, the indices soared back into the green. The central bank acknowledged economic growth was “considerably slower” than the Fed’s expectation and said that “some of the recent weakness” is due to temporary factors like higher crude prices and Japanese crisis. Additionally, the Federal Reserve said that the committee had discussed a “range of policy tools” in a bid to boost the economy.
However, a market analyst interpreted the announcement to be largely negative and opined that the Fed’s decision to keep the rate low for such an extended period means that the economy will face the weakness for a long period.
The gains came in after almost two and half weeks of decline. Over this two and a half week period, markets have been weighed down by the impasse over debt-ceiling negotiations, economic woes on the domestic and European front and most significantly S&P’s downgrading of the US credit rating.
In what was one of the biggest blows in recent time, S&P downgraded the US’s rating from AAA to AA+ for the first time since 1917. The credit rating agency said that policy making had become “less stable, less effective and less predictable than what we previously believed” and “at a time of ongoing fiscal and economic challenge”. The rating agency also questioned the “effectiveness, stability, and predictability’ of the ‘political institutions”. This was a serious blow to the markets and sent the benchmarks crashing down as the Dow, S&P 500 and the Nasdaq lost 5.6%, 6.7% and 6.9%, respectively. Thus, the gains that the markets enjoyed were significant enough and came as a great respite to worried investors. The markets’ jump did erode some of the losses and the Dow, S&P 500 and the Nasdaq are nowdown 1.8%, 2.2% and 1.1%, respectively, for this week.
Zacks Investment Research
