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Fed Kills Rally but Dow Snaps Losing Streak

Published: Wednesday, 30 Apr 2008 | 5:15 PM ET

Text Size

By: Cindy Perman
CNBC.com

Stocks finished slightly lower Wednesday as another rate cut and no indication from the Federal Reserve that it plans to stop anytime soon killed an earlier rally.

"The Fed's decision to cut rates doesn't help support the dollar," said Tom Schrader, managing director for U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore. The market is responding to the fact that "the dollar is probably going to lead to a rebound in crude prices," he said.

Still, all three major indexes finished higher on the month. The Dow Jones Industrial Average gained 4.5 percent, snapping a five-month losing streak. The S&P 500 rose 4.8 percent, its best monthly percentage gain since December 2003. The Nasdaq advanced 5.9 percent, its best monthly showing since July 2005.

The CBOE Volatility Index, the best gauge of fear in the market, ticked higher Wednesday but was down 19 percent for the month.

Major U.S. Indexes - April

	Last	Change	% Change	1 Month % Change	YTD % Change
Dow	12,820.13	-11.81	-0.09%	4.54%	-3.35%
S&P 500	1,385.59	-5.35	-0.38%	4.75%	-5.64%
NASDAQ	2,412.80	-13.30	-0.55%	5.87%	-9.03
Russell 2000	716.18	-2.75	-0.38%	4.10%	-6.51%
CBOE VIX	20.78	0.54	2.67%	-18.86%	-7.64%

Crude oil [US@CL.1 Loading... () ] crept above $114 a barrel after the Fed rate decision, but remained down about a dollar from the prior close. Earlier, the EIA reported a larger-than-expected build in crude inventories.

Retail, housing and tech stocks retreated, while commodities stocks increased ahead of ExxonMobil's [XOM Loading... () ] earnings on Thursday. (See a preview of Exxon earnings.)

The Fed lowered its target for the federal-funds rate by a quarter percentage point to 2 percent and cut the discount rate by the same amount. It was the central bank's fourth rate cut this year and the seventh since the current cycle began in September.

Investor Intelligence

Importantly, policy makers didn't indicate in their statement, as many on Wall Street had expected, plans to halt this current cycle of rate cuts. Only two policy makers dissented, calling for no change in interest rates.

The market's brief pop after the Fed decision was probably due to the fact that the market assumed a rate cut would come with some kind of indication of a pause, Schrader said, and the gains evaporated as the market digested the statement.

"The market expected [the Fed to say] something hawkish toward further rate cuts -- the Fed didn't do that. They just kind of moderated what they were saying about the economy," Schrader said.

“The Fed left the door a little bit more open to additional rate cuts than I think the market had expected,” said Jeffrey Kleintop, chief market strategist at LPL Financial in Boston. “I think the market wanted to see something like, ‘We’re done – period.’ as a statement.”

From 'Fast Money':

Fed's Done. Now What?

Kleintop noted that, right after the decision, fed-funds futures began to price in another potential rate cut, with futures indicating a 1.935 implied rate for August, down from 2.02 before the meeting.

"This rate cut leaves questions as to whether there may be some further economic pain going forward," Schrader said.

For most of the day until the Fed rate decision, stocks were up sharply, energized by better-than-expected economic and earnings news.

U.S. gross domestic product grew at a 0.6 percent annual pace, beating expectations, the Commerce Department reported in the first of three readings on first-quarter GDP. ADP said private-sector employers added 10,000 jobs to payrolls in April. A report on midwest manufacturing activity also came in better than expected. However, mortgage applications slumped to their lowest level since December.

General Motors [GM Loading... () ] jumped 9.4 percent, making it the top gainer on the Dow, after the auto maker posted a smaller-than-expected loss for the first quarter. Still, GM posted a hefty net loss of $3.3 billion due to a costly supplier strike and waning demand for some of its most profitable vehicles. GM also took a $1.45-billion charge for its remaining investment in finance company GMAC and a $731-million charge for its exposure to the bankruptcy of auto-parts supplier and former subsidiary Delphi.