Stocks advanced but ended off their highs Wednesday after the Federal Reserve said the recession appears to be easing.
The Dow Jones Industrial Average gained 168.78, or 2.1 percent, to close at 8,185.73. The S&P 500 rose 2.2 percent and Nasdaq advanced 2.3 percent.
After a two-day meeting, the Fed issued its statement saying the pace of economic deterioration appears to be slowing. This was the first time the Fed has offered an indication that it's seeing signs of the slump letting up. Still, Fed officials said they planned to keep interest rates low for an extended period of time.
"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Fed said in a statement.
Fed watchers were encouraged.
"The fact that the Fed didn’t announce any new approaches is somewhat good news. It means there haven’t been any major surprises popping up that required additional policies," Joel Naroff of Naroff Economic Advisors, wrote in a note to clients.
"Indeed, the longer we go without the Fed having to become even more imaginative, the closer we come to the point where we can say we are starting to get out of the recession," he said.
>> Liesman: Fed Takes a Steady-as-She-Goes Approach
Stocks had started the day higher as investors shrugged off a gloomy headline GDP number and focused on the bottoming of inventories. Banks rallied and Qwest earnings buoyed techs.
The rebound comes after two straight down days to start the week, amid worries that swine flu could hinder the global economic recovery and that banks may need to raise more capital.
The government's first read on first-quarter gross domestic product showed the economy contracted at a 6.1 percent pace, much sharper than the 4.9 percent economists had expected, amid declines in exports and business inventories. The economy contracted at a 6.3 percent rate in the fourth quarter.
But investors were encouraged by the decline in inventories.
"What everybody is hanging their hat on is this inventory draw, and the expectation that inventories are that far down that the next thing that's going to happen is that you're going to have to build inventories and we're going to have start manufacturing," Paul Nolte of Hinsdale Associates, told Reuters.
"The expectation is this is the worst and things get better from here because we will start to rebuild inventories," Nolte said.
Tuesday's economic readings also offered some cause for optimism: Consumer confidence shot up last month and home prices are still falling but the pace is slowing.
Oil prices rose more than $1, settling at $50.97 a barrel, after the Department of Energy said crude inventories rose by 4.1 million barrels last week.
Positive earnings reports added to the feel-good mood on Wall Street.
Juicing techs, Qwest Communications beat earnings expectations even as revenue fell 7 percent. Qwest shares rose 3.1 percent.
Elsewhere, Wyeth narrowly beat analyst expectations, posting a profit of 89 cents per share, but revenue fell below estimates as a strong dollar hurt overseas sales. Its shares gained 0.8 percent.
Time Warnerbeat analysts' targetandbacked its full-year guidance. Shares rose 1 percent.
Though, ArcelorMittal , the world's largest steelmaker, missed its earnings target as the economic slump crimped demand. Shares fell 4.7 percent.
Bank stocks rebounded.
Bank of America shares jumped 6.5 percent after a rowdy annual meeting in which shareholders blasted CEO Ken Lewisover his handling of the Merrill Lynch deal. Still, Lewis and all of the board members were re-elected, though Lewis may still be stripped of his chairman of the board title — that vote was too close to call.
Citigroup gained 8 percent after the bank asked for government permission to pay bonusesfor certain employees and is looking to free its energy-trading unit from government restrictions.
JPMorgan added 5.2 percent.
Wal-Mart shares rose more than 3 percent after the discount retailer reported that consumers are spending more on discretionary itemssuch as sporting goods and bedding.
Still to come: Results from Visa and Starbucks are due out after the closing bell. Analysts expect to see earnings of 64 and 15 cents a share, respectively.
Trading was moderate, with 1.48 billion shares changing hands on the New York Stock Exchange. Advancers outpaced decliners, about 5 to 1.
Still to Come:
WEDNESDAY: Fed statement; Bank of America shareholders meeting; Earnings from Starbucks and Visa after the bell
THURSDAY: Weekly jobless claims; personal income/spending; Senate Appropriations Committee meets to discuss administration's request for more money for Iraq, Afghan wars; Kansas City Fed report; Fed's Volcker speaks; Earnings from ExxonMobil, AstraZeneca, Cardinal Health, Colgate-Palmolive, Comcast, Ericsson, Kellogg, Motorola, Viacom and MetLife
FRIDAY: Auto sales; Fed's Geithner, Bullard speak; Reuters/Univ of Mich consumer confidence; ISM manufacturing index; factory orders; Earnings from Chevron, Clorox, MasterCard and Simon Property
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