Stocks Rally to Record Highs Amid Positive Rate Outlook

Stocks soared to new records as investors speculated that the Federal Reserve is unlikely to raise interest rates anytime soon.

The Standard & Poor's 500 index climbed to its first record close in more than seven years after minutes of the Fed's last policy meeting offered investors no major surprises about
the economy. The Dow Jones Industrials and Russell 2000 small-cap stock index also closed at new highs.

The minutes of the May 9 meeting showed Fed officials believe the housing slowdown could last longer than expected but that inflation remained "uncomfortably high."

For some traders, the minutes reaffirmed their belief that the Fed will take no action anytime soon. And CNBC's Rick Santelli reported that some traders saw downbeat comments from the Fed about the economy as a sign that a rate cut is still possibly at year-end.

"What the Fed said is growth is going to stay below trend and then it's going to pick back up in 2008," said Stuart Schweitzer, global markets strategist at JP Morgan Private Bank. "Inflation, although it's their predominant worry, is likely to ease back and that's just a picture perfect recipe for the market."

The S&P 500, considered by traders as the best barometer of U.S. stocks, surpassed the record of 1,527.46, set March 24, 2000, at the peak of the dot-com boom. The Dow, the first of the major market indexes to recover from Wall Street's prolonged slump in the early part of the decade, also closed at a record. And the small-cap Russell 2000 Index hit a new high of 843.35.

Brief Dip at First

The major averages took a brief dip after the release of the Fed minutes, then bargain hunters came back in. Energy was the best performing S&P 500 sector, rising more than 1%, on a rebound in oil prices. Telecom was also a top performer. Healthcare was the only sector in the red.

Real estate investment trusts were among the best performing stocks amid takeover speculation after No. 2 U.S. apartment REIT Archstone-Smith  said on Tuesday that it has agreed to be acquired for $22.2 billion.  Today, Deutsche Bank upgraded eight REIT stocks.

Stocks had opened lower after a selloff in Chinese stocks sparked a decline in Asian and European markets.

The downturn was caused by the People's Bank of China tripling a share-trading tax in an attempt to cool off speculation in China's hot stock market.  The move added fuel to former Federal Reserve Chairman Alan Greenspan's fears of a sharp correction in the region.

But U.S. stocks quickly recovered from the China news and many market pros still think China is a good long-term investment.

"I think the recent trend is still in place where we get these little shocks and move on," Bill Nichols, senior managing director of equity trading at Bear Stearns, told CNBC.com. "China had already run up tremendously. People are looking back at past experience and saying this has nothing to do with the Chinese economy."

In company news, Ford Motor said the company's overall U.S. sales will drop in May, but U.S. retail sales will increase for the first time in six months.

Shares of Coldwater Creek surged 15% in heavy trading after the apparel retailer posted first-quarter earnings that handily topped Wall Street forecasts.  The company also got an analyst upgrade.

Apple said it launched iTunes Plus, a digital rights management-free music download service, for $1.29 a song. Morgan Stanley also raised its price target on Apple to $150 from $110.

Shares of CDW Corporation surged after the company announced Tuesday it has agreed to be acquired by a private equity company for $7.3 billion.

New York light sweet crude futures rebounded modestly to trade back above $63 a barrel after plunging more than $2 a barrel when developments in major oil producers Iran and Nigeria eased geopolitical concerns. 

Treasury prices edged higher, sending yields lower.

European Shares Finish Lower

Weakness from the slump in Chinese stocks carried through to European trading as investors paused to see the full effect of the People's Bank of China's cooling measures.   However, stocks in Europe finished off earlier lows.

The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed moderately lower.

In corporate news, the future of Italian airline Alitalia was uncertain as a consortium bidding for a controlling stake in the loss-making airline, which included private-equity company TPG, withdrew its offer, leaving only two possible buyers. Shares of Alitalia fell.

In earnings news, Norway's Statoil missed expectations with a 28% fall in first-quarter operating profit, as lower oil and gas prices hurt its bottom line. Shares of Statoil declined.

Meanwhile, HSBC's head of global capital markets, Danny Palmer, resigned after fewer than three years with the bank, and Chrysler's marketing chief also stepped down.

Asian Markets Lower

Chinese stocks slumped, knocking Asian markets lower but failing to trigger the broad rout some had feared.

The Shanghai Composite Index closed 6.5% lower after the government hiked the stock trading tax in its strongest effort yet to cool a speculative bull run.

Tokyo's Nikkei 225 Average closed lower as shares of Chugai Pharmaceutical tumbled more than 7% after a brokerage cut its rating on the stock, citing a lower-than-expected price for a cancer drug. Electronic components makers such as Kyocera fell after data showed industrial output unexpectedly dropped in April, a possible sign that demand for Japanese exports is slowing.

© 2009 CNBC.com