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Stocks Gain 1.3% After Fed's 'Rosy' Outlook

Wednesday, 12 Aug 2009 | 5:19 PM ET

Stocks rallied Wednesday, buoyed by an improved outlook from the Fed and an encouraging housing report.

"I think [traders] like the rosy outlook from the Fed," said Dan Cook, senior market analyst at IG Markets. "The initial reaction was to sell off a bit but when the market fully digested the statement, it seemed to like it," Cook added.

The Dow Jones Industrial Average rose 120.16, or 1.3 percent, gaining back the previous session's 1-percent declineand more. The Nasdaq jumped 1.5 percent and the S&P 500 advanced 1.2 percent.

The Federal Reserve said "economic activity is leveling out" and "conditions in financial markets have improved further in recent weeks."

In the June statement, the Fed had said "the pace of economic contraction is slowing." The fact that it changed the language to "leveling out" may not seem like much but it's significant, said Joel Naroff of Naroff Economic Advisors.

"That the economy is leveling out indicates to me the members believe the recession is basically over," Naroff said.

The Fed also said it's extending its Treasury-buying program through the end of Octoberbut intends to "gradually slow the pace of these transactions."

Naroff said that's a "modestly positive signal" from the Fed and that, at this rate, the Fed's first rate increase would likely come on Dec. 16 or Jan. 27.

But "once they start raising rates — watch out. They are likely to proceed at a rapid pace," Naroff warned.

(Read the full text of the Fed statement.)

Cook says he would still be cautious of today's gains, particularly after the market's recent four-week rally, in which it gained 15 percent.

"There's still some downside to the market that's not priced in," Cook said, citing the shaky jobs front, a big credit restraint on consumers and commercial real estate among the potential speed bumps for the market. "A substantial correction would not be out of line at this point," he said.

Financials were the biggest gainer, with the S&P financial-sector index up 2 percent, rebounding off a 3.5-percent slide Tuesday.

Good news on the housing front this morning: Existing-home sales rose 3.8 percent to an annual rate of 4.76 million in the second quarter, the National Association of Realtors reported. And the median sales price rose 4 percent to $174,100 in the second quarter from the first, though prices are still down nearly 16 percent from a year ago.

Toll Brothers also delivered some much-needed good news on the housing sector. The homebuilder projected a 42-percent drop in third-quarter revenue but said the number of contracts signed increased for the first time in 16 quarters.

Toll Brothers shares jumped more than 14 percent. Beazer gained more than 9 percent, while Lennar and Pulte advanced 4 percent.

Mortgage applications fell 3.5 percent, however,as rising mortgage rates depressed refinancing demand. And the trade gap widened in June to $27 billionas higher prices on oil imports offset gains in exports.

Today's Treasury auction of $23 billion in 10-year notes was met with mediocre demand. The high yield was 3.734 percent, and the bid-to-cover ratio was 2.49, in line with the recent average of 2.48. This latest round will conclude tomorrow with a 30-year auction.

AIG shares rose 1.7 percent after the insurer agreed to sell its Hong Kong consumer finance and India-based IT services units.

Macy's jumped 6 percent after the retailer beat expectations, helped by cost-cutting efforts, but fell short with its full-year outlook.

And Sara Lee , which makes everything from coffee cakes to Jimmy Dean sausages, also topped forecasts. But its shares fell 10 percent as sales fell sharply.

Applied Materials, the biggest maker of semiconductor manufacturing equipment, reported a smaller-than-expected loss after the bell Tuesday and delivered an upbeat forecast for the current quarter. Its shares rose 3.3 percent.

There are signs that the IPO market is returning to normal: Emdeon shares jumped 6.6 percent on their debut, the 15th of 17 IPOs this year to rise on their first day of trading.

And Starwood Property Trust closed at $20, its IPO price. Both Starwood and Emdeon increased the size of their IPOs at pricing to meet demand.

Volume was low, with 1.23 billion shares changing hands on the New York Stock Exchange. Advancers outpaced decliners, roughly 11 to 4.

- Peter Schacknow contributed to this report.

Still to Come:

WEDNESDAY: Fed announcement; Earnings from Macy's
THURSDAY: Retail sales; weekly jobless claims; import/export prices; business inventories; Treasury 30-year auction; Earnings from Wal-Mart, Kohl's and Nordstrom
FRIDAY: CPI; industrial production; consumer sentiment; Earnings from JCPenney

Send comments to cindy.perman@nbcuni.com.

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