U.S. Stocks Stage Biggest Rally in 8 Months After Fed Statement
By Eric Martin
March 21 (Bloomberg) -- The Federal Reserve's surprise decision to shift its bias away from higher interest rates helped the U.S. stock market post its biggest gain in eight months and erase almost all its losses for the year.
Citigroup Inc. and JPMorgan Chase & Co. sent the Standard & Poor's 500 Index to its steepest three-day rally in four years on prospects the Fed will lower borrowing costs, spurring loan demand and bolstering profits. Morgan Stanley, the world's second-biggest securities firm, climbed the most since March 2003 after reporting first-quarter profit surged 70 percent to a record.
The advance, one month after stocks recorded their biggest decline since 2003, pushed the S&P 500 up 1.2 percent for the year and pared the Dow Jones Industrial Average's 2007 drop to 0.1 percent. The Nasdaq Composite Index's third straight jump, bolstered by Oracle Corp.'s better-than-expected profit, lifted the index to a 1.7 percent rise this year.
``We've been waiting for the Fed to be on our side,'' said Michael Mullaney, who manages $10 billion at Fiduciary Trust Co. in Boston. ``The Fed's next move is probably going to be a cut, and probably sometime no later than August.''
The S&P 500 added 24.10, or 1.7 percent, to 1435.04, its best performance since July 19. The Dow average increased 159.42, or 1.3 percent, to 12,447.52. The Nasdaq rose 47.71, or 2 percent, to 2455.92.
Central bank officials held the benchmark interest rate at 5.25 percent for a sixth meeting, matching the estimates of all 94 economists surveyed by Bloomberg. While inflation remains the ``predominant policy concern,'' the Fed dropped a reference to ``additional firming'' in its statement.
`Mixed'
Recent economic data have been ``mixed'' and the ``adjustment in the housing sector is ongoing,'' said policy makers. Even so, they expect the economy to keep growing at a ``moderate pace'' in coming quarters.
The language suggests officials see substantial risks of a further economic slowdown that will reduce inflation pressure, warranting a more balanced outlook. Traders may interpret the change as a signal that the Fed will consider cutting rates by either the May or June policy meetings.
``The market has in hand a piece of paper from the Fed saying, `We agree with your expectations: recession is a very low probability and inflation seems to be coming into our comfort range,'' said Stephen Wood, who helps manage about $200 billion as a portfolio strategist at Russell Investment Group in New York. ``The Fed could well cut somewhere in the second half of the year.''
Fed Fund Futures
Interest-rate futures contracts show a 44 percent chance the Fed will lower its target overnight lending rate between banks a quarter-percentage point to 5 percent on June 28, compared with 26 percent odds yesterday.
In the past four weeks, more than $600 billion has been wiped from U.S. stock-market value as reports showed late payments on subprime mortgages jumped to a four-year high.
Today, a gauge designed to measure future stock market swings fell in the wake of the Fed statement. The Chicago Board Options Exchange's SPX Volatility Index, or VIX, dropped 8 percent to 12.21, its lowest since the rout on Feb. 27 spurred its biggest jump ever.
More than eight stocks rose for every one that declined on the New York Stock Exchange. Some 1.6 billion shares changed hands on the Big Board, 3.3 percent more than the three-month average.
A measure of financial companies rose the most among the S&P 500's 10 industries, rallying 2.4 percent. Lower rates may help sustain demand for mortgages and loans and boost the value of bonds owned by banks, brokers and insurers.
Citigroup, the biggest U.S. bank, climbed $1.39 to $52.03. JPMorgan, the third largest, increased $1.30 to $49.05.
To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net .
Last Updated: March 21, 2007 16:14 EDT
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