Stocks closed higher for the second straight session as Wall Street continued to celebrate Tuesday's half-point rate cut and analysts looked to the Fed for further action.
"We got a Christmas present yesterday and we'll take it, but the game is not over yet," said Gregory Church, chief investment officer at Church Capital Management.
"The Fed movement was psychologically really important for the markets," Keith Wirtz, chief investment officer with Fifth Third Asset Management, told CNBC.com. "I think we'll see a series of two or three more rate adjustments down to ensure the credit markets relax a bit."
The rally was broadly based with buying across all of the S&P 500 sectors. Materials, utilities and telecom were the biggest percentage gainers. The influential financials sector also traded higher. General Motors was the biggest percentage loser on the Dow on concerns about UAW labor discussions with the Big Three.
"After the profit-taking didn't happen this morning, I think the longer we can stay at these levels, the more people you'll have coming in to cover shorts," said Robert Heller, managing director at Chapdelaine Brokerage. "I think this can last maybe even until the end of the week. People might start talking about Dow 14,000 again."
Wall Street was also encouraged by more relatively tame inflation data.
Retail price inflation declined unexpectedly in August, dropping by 0.1%. The consumer price index (CPI) rose 0.1% in July. The core CPI, excluding volatile food and energy prices, climbed 0.2%, the same as in July, and in line with expectations.
The housing market continues to show signs of weakness. U.S. home construction starts fell 2.6% in August to their lowest level in more than 12 years. Building permit activity, a sign of future construction plans, fell 5.9%, the lowest pace since June 1995.
Treasury prices declined, sending yields higher.
Wall Street was still gleeful following a surprise half-point rate cut gift from the Federal Reserve on Tuesday.
"This is what we've been waiting for," said Gordon Charlop, president of Walter J. Dowd. "The Fed cut rates, they've turned things around. We're good to go, baby. It's all green. We're going to be carrying stocks right through the end of the year."
Turbulent credit markets resulting from ongoing problems in the home mortgage sector prompted the Fed to lower interest rates by half a percentage point to 4.75%. The last time the U.S. central bank cut rates was June 2003 when Alan Greenspan was chairman.
In a related move, the Fed said it unanimously voted to lower the discount lending rate to 5.25%.
David Sowerby, chief market analyst at Loomis Sayles & Company, believes the Fed cut was not just a reaction to the subprime mortgage crisis, but more of a recognition that real GDP growth had slowed to less than 2%.
"When nominal fed funds were trading above GDP growth rates, that signaled the Fed needed to ease and we got 50 basis points yesterday," said Sowerby. "We're probably going to get another 75 basis points between now and early '08."
European stocks closed sharply higher, while Asian stocks closed higher with the banking stocks leading the gains.
The CBOE Volatility Index fell to trade below $20.
New York light sweet crude futures traded above $82 a barrel before pulling back just under that level on profit taking. The price spike and subsequent pullback followed a larger-than-expected draw down in crude oil inventories last week. The Energy Information Administration said crude supplies declined by 3.8 million barrels, double the expected draw down of 1.5 million barrels, according to a Dow Jones survey.
Gasoline supplies rose unexpectedly by 400,000 barrels last week. Gasoline inventories were expected to have dropped by 1.3 million barrels.
On the corporate side, Morgan Stanley said third-quarter profit fell 17%, as the No. 2 U.S. investment bank was hurt by a global credit crisis that cut into stock trading, corporate lending and results from investments. Quarterly profit fell to $1.44 a share, short of the $1.54 a share profit analysts polled by Thomson Financial were expecting.
Shares of General Motors declined. The automaker is proposing a cost-saving trust fund for health care expenses for all United Auto Workers union members, not just retired GM workers, according to a person close to union negotiations. The Wall Street Journal also reported that the Big Three automakers are only looking to pay 70 cents on the dollar to cover the costs of healthcare.
General Mills reported a rise in its first-quarter profit of 8%, saying rising revenue offset higher ingredient costs and increased spending on marketing. The foodmaker reported earnings of 81 cents a share, slightly better than the 80 cents a share analysts were looking for.
And Countrywide CEO Angelo Mozilo said late Tuesdaythe lender was out of the subprime business, giving a bullish outlook for the company. Buthe called on the government to do more to help troubled borrowers.