Investors sent stocks sharply higher today after the Federal Reserve reassured Wall Street that economic growth would continue despite a recent slowdown and a surge in oil prices.
The Dow Jones industrial average rose 130 points in a late-session rally.
As expected, the Fed’s Open Market Committee raised benchmark interest rates by a quarter percentage point, to 1.5%, the second hike in the past three months. But investors were more concerned with the central bank’s accompanying economic assessment.
The Fed said the economy has slowed, including job creation, but added that it “appears poised to resume a stronger pace of expansion going forward.”
The Fed said soaring energy prices contributed to the weakness but that their effect would be transitory.
That appeared to cheer investors, who were already buying stocks in response to a dip in oil prices. But analysts did not see the gains as significant.
“The Fed did what it was expected to do. But in the long term, in light of the economic weakness, this bounce we’re seeing in stocks is really not meaningful,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers in Boston.
“I think we need to look at the subsequent economic data and then to third-quarter earnings to see what kind of economy we’re going to have.”
On Wall Street, the Dow Jones industrial average gained 130.01, or 1.3%, to 9,944.67.
Broader stock indicators were sharply higher as well. The Standard & Poor’s 500 index climbed 13.82, or 1.3%, to 1,079.04, and the Nasdaq composite index was up 34.06, or 1.9%, at 1,808.70.
While prices rallied impressively – the Dow had its biggest one-day advance since June 7 – the question remained whether the markets would continue to make up lost ground after last week’s major sell-off.
“I think there’s reason to be bullish,” said Robert Millen, co-portfolio manager with the Jensen Portfolio in Portland, Oregon. “What gives me a lot of comfort in the long term is that there are a lot of good things going on in the economy. Companies that have good pricing power and competitive advantages are going to do well.”
However, analysts noted that the market remains fragile, with fears of terrorism, a continued rise in oil prices, interest rates and the upcoming presidential elections all posing the possibility of a renewed drop in share prices.
Despite the downturn in consumer spending and job creation through June and July, the Labour Department announced a 2.9% hike in worker productivity for the second quarter. While it was the smallest increase since 2002, it was far more than economists had expected. And with crude oil down 31 cents to 44.53 dollars a barrel today, many analysts said the market was due for at least a short-term rally.
“Really, we’re in a heavily oversold market, and I think the path of least resistance this week has to be to the upside,” said Brian Pears, head equity trader at Victory Capital Management in Cleveland.
“In the short term, I think the stars are aligning to get us out of this oversold condition this week.”
Advancing issues outnumbered decliners by about three to one on the New York Stock Exchange, where volume came to 1.24 billion shares, compared to 1.08 billion on Monday.
The Russell 2000 index of smaller companies was up 11.36, or 2.2%, at 529.74.