Stocks climed after President Bush outlined his plan to help distressed homeowners, and Federal Reserve Chairman Ben Bernanke said the Fed will "act as needed" to address credit concerns.
“Bernanke and the President today came out and gave some very supportive and encouraging remarks to the market,” said Jason Pride, research director of Haverford Trust. “It’s in line with our theory that we’re in a mid-cycle slowdown and not recession. In that case, you want to be buying equities.”
Groups tied to housing and the financial sectors rebounded on the belief that the Fed will make good on Bernanke's assurance that the central bank will react to future problems in the credit markets should they arise.
Hovnanian and Pulte were among the homebuilder stocks that led the market higher. Battered mortgage lender Countrywide Financial also rose, while Citigroup led advances in large-cap banks.
Shares of Accredited Lenders soared. Lone Star Funds said it was prepared to buy the subprime lender at a lower price than it had previously agreed to, easing fears that the acquisition might fall apart.
For the month, the Dow rose 1.25%, while the S&P 500 gained about 1.5% and the Nasdaq Composite jumped nearly 2% coming well off the lows of the middle of the month which preceded a discount rate cut by the Fed.
President Bush announced a proposal to allow some 80,000 homeowners refinance with FHA insurance protection if they fall behind on their mortgages.
Bernanke, in a speech at the central bank's meeting in Jackson Hole, Wyo., gave a blunt assessment of the credit situation, saying financial stress is not confined to the mortgage markets. Bernanke said the Fed will act if needed, but he did not commit to any specific actions. Bernanke said the Fed is not responsible for protecting lenders and investors from bad decisions and he indicated that it's not clear a federal funds rate cut would solve the housing problem anyway.
"I think bottom line he reaffirmed the Fed's bias towards easing," said Mark Zandi, chief economist at Moody'sEconomy.com. "I do think he'll get more economic data and the anecdotes will add up to some Fed easing by the September meeting. I don't see any way around that."
Volume was light, as is typical on a Friday, while the CBOE Volatility Index fell to trade well off of its 52-week high of 37.50, but still well above historical norms.
In corporate news, An experimental AIDS drug developed by Merck got a boost Friday when staff with the Food and Drug Administration said they support the safety and effectiveness data of the pill, called Isentress. A panel of FDA advisers will meet Sept. 5 to review Merck's bid and make a recommendation.
Toyota Motor expects to sell 10.4 million vehicles in 2009, up 18 percent from last year, as it taps surging demand in China and emerging economies and grabs market share in Japan, Europe and the United States.
Treasury prices fell, sending yields higher.
Pressure has been mounting on Bernanke from CEOs of major companies and prominent analysts to reduce the rate to avoid an economic downturn. The market has already priced in a quarter-point cut, Tim Hughes, head of sales trading at IG INDEX, told "Worldwide Exchange."
Investors were encouraged by economic data that showed an increase in personal income and spending, but tame inflation numbers.
Personal income in July rose 0.5%, while personal spending rose 0.4%. The core PCE price index -- personal consumption expenditure excluding food and energy -- is one of the Fed's favorite inflation gauges. The Commerce Department said core consumer prices rose a less-than-expected 0.1% in July. Economists expected the core index to be up 0.2%.
The National Association of Purchasing Management - Chicago said its index of Midwest business activity rose in August to 53.8 from 53.4 in July. Economists were expecting a decline in manufacturing activity.
New York light sweet crude futures rose on persistent weather concerns as another storm formed in the Atlantic.