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Surprise rate cut propels Dow, Nasdaq
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NEW YORK (CBS.MW) - The major averages zoomed Wednesday, staging an across-the-board monster rally as the Federal Reserve caught investors off guard with its decision to trim short-term rates by half a percentage point one month ahead of its regularly scheduled meeting. Both the Dow Industrials and Nasdaq saw their best closing levels in five weeks.

That marked the central bank's second inter-meeting move since the beginning of the year and its fourth in 2001. The overnight Fed funds rate has fallen 2 full percentage points since January, taking the overnight target rate to 4.50 percent. See full story.

The Nasdaq, up 8.1 percent, saw its fourth largest percentage move ever and its second heaviest volume day.

"Short-term players were forced to adjust positions and this has led not just to short covering but also to outright institutional buying. Investors are putting money to work here," said Scott Bleier, chief investment strategist at Prime Charter.

While Bleier believes the Nasdaq can reach 2,500 in the springtime on the sheer momentum that such oversold conditions typically bring, he advises individual investors to not chase the current rally.

"At some point, it's possible we retest the lows on Nasdaq," Bleier concluded.

In the meantime, Merrill Lynch's chief U.S. investment strategist Christine Callies upped the equity portion of a balanced portfolio to 70 percent from 65 percent while lowering the bond portion to 25 percent from 30 percent. Merrill's 12-month target for the S&P 500 Index is 1,570.

The Dow Jones Industrial Average (US) soared 399.10 points, or 3.9 percent, to 10,615.83 while the Nasdaq Composite (US) soared 156.22 points, or 8.1 percent, to 2,079.44.

The Dow's frontrunners included Intel, Hewlett-Packard, Home Depot, American Express, Wal-Mart and J.P. Morgan Chase. The only downside movers were Merck, Johnson & Johnson, Philip Morris and SBC Communications.

"The [Fed's] timing was perfect. Everyone had given up hope so the Fed maximized the surprise and got [the most] bang for its buck," said Drew Matus, financial economist at Lehman Bros. Matus now expects the Fed's May 15 meeting to produce a cut of 25 basis points instead of the 50 basis points that had been expected before the latest move.

With an eye to stocks, the policy-makers may have been thinking about investor sentiment, some observers said. "You can easily take from the Fed's statement that rates were cut for the equity market," Matus said.

"If ever there were a surprise, this is it. After a couple of weeks of being told by Fed officials that inter-meeting cuts are generally to be avoided, this was not on anyone's agenda," commented Ian Shepherdson, chief U.S. economist at high Frequency Economics. "It must also prompt the question of whether the Fed knows something we don't, though the statement focuses largely on just two elements of the macro story -- the weakness of capital spending and the impact of falling wealth on consumption."

Even before the rate-cut news, tech stocks had flourished right from the start of trading Wednesday amid hopes that most of the bad news on the earnings front may already be reflected in stock prices.

In another encouraging move, investors again managed to shrug off warnings - this time one from Dow component Hewlett-Packard -- and instead zeroed in on better-than-expected news, such as Intel's better-than-expected earnings report.

All tech sectors registered massive gains, with hardware and chip issues enjoying the heftiest advances. In the broad market, brokerage, bank, biotech, retail and cyclical shares climbed while traditionally defensive areas of the market -- such as drug and utility -- declined. Natural gas, oil, and oil service issues also sagged. View the latest market stats.

Among other major market gauges, the Nasdaq 100 Index ($NDX) climbed 159.28 points, or 9.5 percent, to 1,830.79, the Standard & Poor's 500 Index (US) surged 3.9 percent and the Russell 2000 Index (US) of small-capitalization stocks gained 2.4 percent.

See After Hours for post-market trading activity.

Volume stood at a heavy 1.90 billion on the NYSE and at 3.18 billion on the Nasdaq Stock Market. Market breadth was extremely positive, with winners trouncing losers by 20 to 11 on the NYSE and by 29 to 12 on the Nasdaq.

Merrill's Callies said the market was acting appropriately to the move.

"We would point out that investors should not be too quick to assume that the rally cannot last. We believe this is very powerful stimulus and we think the market has already set itself up to respond to improving data from the economy at some point this year," she said in a research note.

Shepherdson applauded the Fed for its "willingness to overlook" recent signs that the manufacturing sector may be warming up again.

"We are reluctant immediately to assume that the Fed will for sure cut rates again on May 15 -- it depends on the data -- though it seems a reasonable working assumption unless we hear otherwise from the Chairman," Shepherdson added.

In its statement, the FOMC worried about the threat of capital restraints and declining wealth combining to keep the pace of economic activity unacceptably weak. The panel noted that "capital investment has continued to soften, and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward."

However, the Fed also noted that a significant reduction in excess inventories seems well advanced and that consumption and housing expenditures have held up reasonably well.

Cohen cuts S&P, Dow targets

Goldman Sachs's head of investment strategy Abby Joseph Cohen lowered year-end targets on the S&P 500 to 1,550 from 1,650 and on the Dow Industrials to 12,500 from 13,000. That represents gains of 30 percent and 22.4 percent from current levels, respectively. Cohen said her 12-month forward price target for the S&P 500 for spring 2002 is 1,600.

"Above trend gains are achievable for these major indexes owing to current undervaluation and belief that an economic black hole is not likely," the Goldman pundit said in a note to clients.

Additionally, Cohen reduced her longstanding 2001 estimate for S&P 500 operating earnings-per-share to $56.50 from $60. She also introduced a forecast for 2002 EPS of $61.50, a projected gain of 9 percent vs. 2001 levels.

"We do not expect an intractable recession and expect profit growth to reaccelerate in the second half of 2001," she added. "The critical point is that we believe much of the damage to profits has already occurred and/or been reflected in stock prices."

Earnings galore

Meanwhile, the downpour of earnings news continued unabated.

Hardware stocks, for one, dismissed H-P's profit warning and were among the biggest upside movers within technology. The company (HWP) told investors Wednesday that rapid deterioration in global information technology spending would cause it to miss second-quarter estimates. H-P climbed 9.1 percent, Dell 8 percent and Compaq 11.8 percent. See full story.

IBM (IBM) swelled 6.8 percent. The company posted after the close Wednesday a first-quarter profit of 98 cents a share, in line with the Wall Street consensus estimate.


Chip stocks reveled in Intel's good news, pushing the Philly Semiconductor Index ($SOX) up a smashing 11.7 percent. The chip behemoth (INTC) jumped 20.1 percent and was the Dow's biggest upside mover after posting late Tuesday a profit from operations of 16 cents in the first quarter, beating the Wall Street consensus estimate by a penny. Investors latched on to Intel's comment that its microprocessor business appears to have stabilized. The stock received a number of upgrades. See latest upgrades and downgrades.

AOL Time Warner (AOL) registered first-quarter earnings of 23 cents a share, topping estimates by 3 cents. Revenue climbed 9 percent during the period and the Internet and media colossus said its America Online unit added 2 million subscribers during the quarter, bringing the total to nearly 29 million. The stock ended up 11.6 percent. See full story. Among other stocks in the Net space, Yahoo jumped 7.6 percent and Amazon climbed 12.2 percent. Business-to-business stocks also enjoyed heady gains.

Brokerage stocks were on fire, sending the Amex Securities Broker/Dealer Index ($XBD) up 7.4 percent. See related story. Powerhouse Merrill Lynch (MER) posted first-quarter earnings of 92 cents a share, down 21 percent from the $1.24 a share last year and 2 cents ahead of the Wall Street estimate. The company said profits declined amid a slump in retail order flow as stock prices dropped. Shares added 9.3 percent.


The Dow's financial components were also on a roll. J.P. Morgan Chase (JPM) posted a profit from operations of 70 cents a share, down from $1.10 per share in the year-ago period and ahead of the 66 cents a share that had been expected by First Call/Thomson Financial. The company said weak stock market conditions resulted in lower equity underwriting. See full story. J.P. Morgan surged 8.2 percent, Citigroup 4.4 percent and American Express 9.2 percent.

Among other Dow stocks reporting results, Coca-Cola (KO) said it made 35 cents a share in its first quarter, two pennies ahead of the consensus estimate. The company also said it's comfortable with current earnings expectations for 2001. And General Motors (GM) reported a profit of 50 cents a share, down from $2.80 a share made in the first quarter last year but well ahead of the 26 cents a share that Wall Street had expected. For the current quarter, GM said it's on track to earn 95 cents a share. See full story. Finally, International Paper (IP) said it had a profit from operations of 5 cents a share in the first quarter, in line with the consensus estimate but well below the 60 cents earned in the same quarter last year. Coke rose 2.3 percent, General Motors 5.9 percent and International Paper 4.6 percent.

Drug giant Pfizer (PFE) posted a profit from operations of 33 cents a share in the first quarter, two cents ahead of the Wall Street estimate and up 34 percent over the year ago period. Shares fell 3.6 percent, mirroring declines in the drug sector.

Select consumer stocks also declined, with the dour tone triggered by an earnings miss from Gillette (G) due to sagging sales and adverse foreign exchange effects. See full story. Gillette lost 8.6 percent, Kimberly-Clark 1.8 percent and Dial 3.2 percent.

Treasury focus

Government prices were mixed in light of the Fed's move. Only short-dated issues gained traction on the rate cut while long-dated securities languished at lower levels.

The 10-year Treasury note was off 1/4 to yield (US) 5.265 percent while the 30-year government bond slumped 1/8 to yield (US) 5.67 percent. See Bond Report.

In economic news, the February trade gap narrowed to $26.99 billion vs. expectations of a $32.7 billion deficit. It was the narrowest level in 14 months. See full story.

And leading economic indicators fell 0.3 percent in February vs. a projected 0.2 percent increase. Thursday will see the release of weekly initial claims and the Philly Fed Index for April. View Economic Preview and economic calendar and forecasts.

In the currency space, dollar/yen slumped 0.7 percent to 122.39 while euro/dollar rose 0.5 percent to 0.8877.


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Julie Rannazzisi is markets editor for CBS.MarketWatch.com in New York.