Stocks surge on Fed cut; Dow up 420, best gain in 5 years
NEW YORK -- One day after investors feared a market meltdown, stocks rocketed Tuesday to their biggest gains in almost 5½ years.
The doom-and-gloom that has permeated Wall Street all year seems to have been broken — at least for now. The turning point appears to have occurred Sunday when the nation's central bank took extraordinary steps to halt the run on investment banks and signed off on JPMorgan's purchase of battered investment bank Bear Stearns.
Additional confidence boosters came Tuesday, when two titans of the investment banking industry, Goldman Sachs and Lehman Bros., posted better-than-expected earnings, easing fears that another big Wall Street firm would suffer a run on the bank and fail like Bear Stearns did.
The Federal Reserve helped by lowering short-term interest rates by ¾ of a percentage point to 2.25%.
The upbeat news fueled a relief rally Tuesday. The Dow Jones industrial average jumped 420.41 points, or 3.51%, to 12,392.66. It was the Dow's fourth-biggest point gain ever.
The Standard & Poor's 500 index enjoyed its biggest percentage gain since October 2002, soaring 54.14 points, or 4.24%, to 1330.74. The Nasdaq composite rallied 91.25 points, or 4.19%, to 2268.26. The rally helped the Dow and S&P 500 trim their losses from the October highs to 12.5% and 14.9%.
Stocks have been hurt by a financial crisis caused by the housing bust.
"What is most impressive is, despite some of the worst news since the 1930s, the market was able to remain above its January lows," says Bruce Bittles, investment strategist at RW Baird.
Bittles says the ability of the market to not drop below January's floor, coupled with the massive pessimism that had been present in the market, suggests "strongly that the downside momentum has been broken."
The key to Tuesday's rally was the performance of Lehman., says Todd Leone, a trader at Cowen & Co. Lehman was rumored to be on the ropes Monday, but the Fed moves Sunday coupled with Lehman's good profit report Tuesday ease fears of a collapse.
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