The Federal Reserve’s statement that “economic growth strengthened somewhat in the third quarter,” helped reverse the trend of consecutive days of losses for the markets. Key indices closed comfortably higher with the Dow posting a three-digit upward movement. The central bank also assured it would take further steps to protect the economy and better-than-expected jobs growth also helped edge out the European concerns.
The Dow Jones Industrial Average (DJIA) surged 178 points or 1.5% to settle the day at 11,836.04. The Standard & Poor 500 (S&P 500) was up 1.6% and closed the day at 1,237.90. The Nasdaq Composite Index added 1.3% to finish the day at 2,639.98. The fear-gauge CBOE Volatility Index (VIX) dropped 5.8% and closed at 32.74. On the New York Stock Exchange (NYSE), Amex and Nasdaq, consolidated volumes remained 10% lower than the 20-day moving average, at 7.5 billion shares. On the NYSE, for every declining stock, five stocks finished on a winning note.
Following two consecutive days of three-digit downslides for the Dow, the blue-chip index staged three-digit jump with Intel Corporation (NASDAQ:INTC) being the lone decliner among its 30 components. Bank of America Corporation (NYSE:BAC) led the pack with a 5.0% jump and other gainers include Alcoa, Inc. (NYSE:AA), American Express Company (NYSE:AXP), Caterpillar Inc. (NYSE:CAT), Chevron Corporation (NYSE:CVX), JPMorgan Chase & Co. (NYSE:JPM) and United Technologies Corp. (NYSE:UTX) and they moved up 3.2%, 2.7%, 2.5%, 2.4%, 2.8% and 2.3%, respectively.
It was the Fed’s statement that guided the markets yesterday. Investors were buoyed by news that the third quarter had showed some strength and the momentum was built up by Fed Chairman Ben Bernanke’s assurance that if necessary the central bank would purchase more mortgage-backed securities. According to the latest policy statement following a two-day meeting: “Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.”
While investors seemed satisfied, Bernanke was not in a similar mood referring to economic growth as “frustratingly slow” and “very unsatisfactory.” Thus, as mentioned earlier, the need for an additional purchase of mortgage-backed securities was a “viable option”. The central bank also chopped its economic growth outlook through 2013 and increased unemployment rate estimates. The Federal Reserve continued to keep the key interest rate within a historically low range of 0% to 0.25%, between which it has been hovering since December 2008. Bernanke also said the central bank is set to keep the rates close to zero at least till the middle of 2013.
Meanwhile, Automatic Data Processing reported that 110,000 new jobs were added by US companies in October, which added to the cheer. Economists had predicted a gain of roughly 100,000, and the higher figure was a result of higher job additions by the services-producing sector and small businesses.
Developments on the domestic front helped divert attention from fresh concerns in the European continent propelled, quiet surprisingly, by the Greek government. In a surprise move, Greek Prime Minister George Papandreou called for a referendum on the European debt plan late on Monday. The announcement comes amidst raging opposition by the public over austerity measures and worsening economic conditions. The surprise move from Greece may jeopardize the entire global economy and experts believe that rejecting the bailout plan might lead to “hard default” by Greece. Meanwhile, sources told a media house that the European Union and International Monetary Fund will not be providing the Greece with a EUR8 billion payment till the referendum takes place.
