Stocks ended broadly higher as investors were hopeful the Federal Reserve will lower interest rates next month.
"You had more people positive today that the Fed is going to cut rates," said Todd Leone, head of listed trading at Cowen & Co. "A lack of bad news is really the main thing moving the markets today -- as long as you don't hear anything negative, the market does OK."
Many investors believe the Fedwill cut interest rates at its next meeting on Sept. 18 or even sooner and were preparing for Fed Chairman Ben Bernanke to hint at such a move on Friday at a speech in Jackson Hole, Wyo. The possibility of a rate cut has given Wall Street some hope that the stock market will recover from its summer volatility, and that right now, it's a good strategy to buy while the buying is cheap.
News that Bernanke said in a letter to Sen. Charles Schumer, D-N.Y., that Fed policymakers are 'prepared to act as needed' if the market's turbulence hurts the economy helped pad the market's gains.
A rally in financial stocks, particularly brokers, also helped keep investor sentiment upbeat, Leone said.
"The whole group is up, and if that group acts OK it gives the market impetus to move higher," Leone said. "Yesterday we had a good, healthy short-term correction, and we're coming back here a little bit. The market has been slowly coming back -- it's been backing and filling."
Some traders were skeptical on the sustainability of Wednesday's rally, which erased the steep losses of a day earlier.
"Everything is looking a little specious," said Peter Costa, managing director and trader at Eckhart and Co. "People are looking at energy stocks, tech stocks -- these are groups that people want to lead the market forward and this is what you're seeing."
"I continue to be amazed by the dramatic swings we see in this market on a day-to-day basis," said Craig Hester, president of Hester Capital Management. "The market is trying to find its bottom here and we'll probably retest those lows before we can move higher here."
Investors are focused on the Federal Reserve's Sept. 18 meeting and are will be looking for clues of a potential rate cut when Chairman Ben Bernanke speaks Friday at the Fed's annual retreat in Jackson Hole, Wyoming.
"Until we know what the Fed will do with interest rates and what this ultimately means for the economy, I don't think we're going to do much," said Steve Massocca, co-chief executive at Pacific Growth Equities. "Sometimes it's best to just hold what you have and sit on your hands, and I think this is one of those times right now."
DJIA: No Component Left Behind
Breadth was positive with advancing stocks outpacing declining stocks by an almost six-to-one margin on the NYSE. All 30 stocks in the Dow Jones Industrial Average traded higher. Gains in the Dow were led by tech stocks such as Intel and IBM, as bargain hunters snapped up the biggest technology names.
All 10 economic sectors tracked by S&P moved higher, with gains led by energy, industrials and technology.
In corporate news, Altria Group said it will spin off its international tobacco unit, Philip Morris International, as widely expected. The stock had opened higher on expectations of a spin-off but quickly pared gains after the company said it raised its quarterly dividend by just 8.7% to 75 cents a share.
The spinoff is the second in a corporate restructuring that earlier saw Altria spin off its holdings in Kraft Foods. The Philip Morris International business is seen as having better growth opportunities, particularly for emerging markets, compared with its Philip Morris USA business.
Shares of Apple moved higher after the company said it will launch a new product next week, prompting speculation the company will unveil a new line of iPods, including a highly-anticipated widescreen version of the popular portable music player.
Dillards shares fell sharply after the company reported quarterly earnings well below Street expectations. The retailer posted a loss of 31 cents a share, compared with analysts' consensus forecast of a loss of a penny a share. Dillards attributed the shortfall to lackluster sales and subsequent markdowns.
Big Lots shares jumped more than 6% after the close-out retailer said Wednesday its second-quarter profit more than quadrupled. Results beat Wall Street expectations by a wide margin as earnings were boosted by strong sales at stores open at least two years and lower expenses.
Mortgage Demand, Oil Stockpiles Fall
Mortgage activity data showed that U.S. mortgage applications fell for a second consecutive week, reflecting a drop in demand for home purchase and refinancing loans even as interest rates sank. The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Aug. 24 decreased 4% to 615.2.
U.S. crude and gasoline stockpiles fell much more than expected last week due to a steep drop in imports and lower refinery utilization, a weekly government report said Wednesday. Crude supplies fell 3.5 million barrels in the week ending Aug. 24, compared with analyst estimated for an 800,000 barrel draw, the U.S. Energy Information Administration said.
Crude oil futures traded in New York rose $1.12 to $72.85 a barrel after the report was released.
Treasury prices moved higher, sending yields lower.
Investors continue to monitor developments in global credit markets, which have been impacted by defaults and other developments in the U.S. mortgage market.
Fitch Ratings downgraded several U.S. homebuilders in the light of problems in the home mortgage industry.
The ratings agency said it cut the ratings for Hovnanian Enterprises, Centex and Lennar, as well as M/I Homes and Standard Pacific.
It lowered the outlook for KB Home, MDC Holdings and Toll Brothers to "Negative," but affirmed its ratings and "Stable" outlook for NVR, citing its strong credit protection and balance sheet liquidity among the main reasons.
And Chrysler may join the trend in the rest of the auto industry and sell non-core business, the Wall Street Journal reported on its Web site.
European stocks shed early losses and were mostly higher as investors saw the U.S. selloff as a buying opportunity. However, analysts said the markets likely will remain volatile because of turmoil in the credit markets.
A structured investment vehicle managed by British hedge fund Cheyne Capital Managementsaid it was seeking to restructure after being forced to start selling assets to pay down debt.