U.S. stocks powered to a sharply higher close in a volatile final hour of trading after the markets Tuesday were roiled by rumors and comments from President Bush.
"The rollercoaster ride is not over yet," said Stuart Schweitzer, global markets strategist at JP Morgan Private Bank. "I think we're in the fourth inning on subprime and credit-related issues, but this economy is resilient."
Once again, the markets were extremely volatile in the final half hour of trading. Unconfirmed rumors about problems at quantitative hedge funds and a possible pre-announcement from Goldman Sachs added to the late session volatility. Goldman Sachs denied the rumors.
Nine of the ten S&P 500 sectors traded higher. Financials, which had led the rally all session, pared some gains in the final hour of trading after President Bush said the government-sponsored enterprises Fannie Mae and Freddie Mac need to be reformed before talks of assisting with the subprime mortgage meltdown.
Financials rebounded to finish up more than 2%. Transportation stocks rallied as railroads gained on news Warren Buffett's BerkshireHathaway increased its stake in Burlington Northern Santa Fe , buying an additional 1.62 million shares.
Meanwhile, homebuilding stocks soared over 6%. The Nasdaq posted solid gains throughout the session after the tech sector got a boost from Cisco, which reported positive earnings and a bullish outlook.
"It wouldn't surprise me if we chop around a little bit here, but we may have seen the worst of the decline," said Richard Sparks, senior equity strategist at Schaeffer's Investment Research. "We've got a lot of fear and worries out there. The market has been focusing on bad things, but there are a lot of good things and we could ratchet higher from here."
The Fed on Tuesday reiterated its focus on tackling inflation, but acknowledged downside risks to the economy had "increased somewhat."
"The Fed actually had some reassuring things to say about the economy and acknowledging problems in the subprime market," Andrew Burkley, market strategist at Brown Brothers Harriman, told CNBC.com. "Good earnings reports are also giving the market some comfort."
"I think yesterday, initially folks were disappointed with what the Fed didn't do and today we've got cooler heads," Al Goldman, chief market strategist at A.G. Edwards, told CNBC.com. "We're seeing a more comfortable feeling with the action taken by the Fed. People are realizing that inflation is always the Fed's number one concern and that's the way it should be."
Treasury prices fell, sending yields higher after reports that Chinese officials have threatened to sell their Treasury holdings if the U.S. imposes trade sanctions.
Shares of Cisco Systems rose to trade above a 6-year high after the network equipment maker reported fiscal fourth-quarter results that beat Wall Street's expectations and boosted its financial forecast. Cisco said profit jumped 25% on strong sales of the routers and switches that direct traffic over the Internet.
"That is a space that's going to continue to grow, primarily because of their global exposure," said Peter Kenny, managing director at Knight Equity Markets.
Sprint Nextel said its second-quarter profits dropped sharply on slightly higher revenue and higher costs tied to its planned rollout of a WiMax network. Not counting one-time amortization, Sprint Nextel said it earned 25 cents a share. That beat the 22 cents a share forecast by analysts surveyed by Thomson Financial.
Further evidence of an economic slowdown came as Toll Brothers said it expects home-building revenue in its fiscal third quarter to slump 21%, year on year, as potential home owners remained reluctant to buy.
In other corporate news, cell-phone giant Vodafone Group decided to keep its 45% stake in Verizon Wireless, the fast-growing U.S. cell-phone joint venture.
In energy markets, the price of New York Light Sweet Crude fell slightly to trade just above $72 a barrel despite a larger-than-expected draw down in crude oil inventories. The Energy Information Administration said crude supplies fell by 4.1 million barrels last week. Crude inventories were expected to have fallen by 2 million barrels. Gasoline inventories fell unexpectedly by 1.7 million barrels. Distillates, which includes home heating oil, rose by 1 million barrels.
On the economic front, wholesale inventories rose by 0.5% in June, the second month in a row for that percentage increase. Inventories were pushed higher by rising stockpiles of petroleum. Wholesale sales outpaced inventories, rising by 0.6%. Most wholesale inventories are imports, so this suggests a moderate increase in imports and a further widening in the trade deficit for June.
European Stocks Close Sharply Higher
London's FTSE-100, , Paris CAC-40 and Frankfurt DAX all closed significantly higher.
Strong European earnings provided individual stock gains with shares in Adidas jumping on the back of a 27% rise in second-quarter profit. But revenue at the sports-goods maker remained largely flat for the period.
Dutch financial services firm ING Groep said solid insurance results pushed quarterly operating profit up more than 8%, topping analysts' expectations. That helped the stock rise nearly 4%.
Dutch brewer Carlsberg posted ahigher than expected first-half profit, helped by sales in emerging markets, which enabled the company to boost full-year profit outlook.
Meanwhile U.K. broadcaster ITV reported a sharp drop in first-half net profit, but investors bought the stock on the company's positive outlook for the third quarter. Shares of ITV rose.
And British insurer Royal & Sun Alliance beat expectations, despite heavy flooding in the U.K.
In economic news, the Bank of England signaled in its quarterly inflation report that U.K. interest rates would have to rise again in order to hit the central bank's 2% inflation target.
Asian Stocks Rally
Tokyo's Nikkei 225 Average finished higher to close above the 17,000 level for the first time in a week, as Fed comments eased concerns about a slowing U.S. economy, lifting Canon and other exporters. Mobile phone carriers such as KDDI surged on data showing that the number of Japanese wireless users expanded, while computer security software firm Trend Micro extended gains on profit prospects.
South Korea's KOSPI gained 2.3%, with the main index above 1,900 for the first time in a week, led by Hyundai Group affiliates on hope August's inter-Korean summit would revive stalled economic projects with North Korea. The Fed's positive view of the U.S. economy lifted exporters, with Samsung Electronics among the biggest gainers.
Australia's S&P/ASX 200 Index closed almost 2% higher as Macquarie Bank gained on easing concerns that a credit squeeze would hurt the U.S. economy, while Brambles jumped on bid talk. Investors shrugged off a widely expected rise in interest rates by the Reserve Bank of Australia and focused on strong economic fundamentals, while expectations of an upbeat company reporting season continued to buoy sentiment.
Hong Kong stocks were sharply higher, in line with other Asian markets and led by HSBC Holdings and China Mobile, after Wall Street gained on the U.S. Federal Reserve's positive outlook on the economy. Coal shares were among the morning's outperformers on talk that coal prices may reach record highs amid supply shortfalls and strong Asian demand. China Coal was up nearly 10% at one point.
Singapore's Straits Times Index rose as much as 3% as investors bought banking stocks such as DBS Group, that had been sold down in previous sessions.
Chinese stocks were slightly higher, with the Shanghai Composite Index gaining 0.3%. Steel shares led declines on profit-taking after this week's jumps, but big banking blue chips such as Industrial & Commercial Bank of China supported the main index.