The surge began at the opening bell after two big investment banks, Lehman Brothers and Goldman Sachs, delivered stronger-than-expected earnings. It faltered only briefly after the Fed’s announcement in the afternoon that it would cut its benchmark interest rate by three-quarters of a point, with the Dow tacking on nearly 300 points in the final hour and a half.
At the end of trading, the Dow was at 12,392.66, a gain of 420.41 points, or 3.51 percent. The Standard & Poor’s 500-stock index advanced 4.24 percent, its best performance since October 2002. It was up 54.14 points, to 1,330.74. The Nasdaq composite index also gained 4.2 percent, or 91.25 points, to 2,268.26.
The rally capped a week of extraordinary efforts on the part of the central bank to restore confidence to financial markets after the near collapse of Bear Stearns, one of Wall Street’s most venerable investment banks.
The three-quarter point cut amounted to a strong dose of financial adrenaline, though some investors had expected an even deeper cut.
“The market, after thinking it over for a few minutes, has come to the right conclusion,” said Jerry Webman, the chief economist and senior investment officer of OppenheimerFunds. “If you look at the policy moves over the last five days, the Fed is doing the best it can out of a bad situation.”
But as stock investors enjoyed the euphoria, ominous signs appeared elsewhere in the market. Widening spreads on mortgage and short-term debt indicated that the Fed’s actions may not have cut to the heart of the current crisis: the lack of willingness among financial institutions to lend to one another.
Spreads on lending between banks and Fannie Mae mortgage bonds widened, a sign of decreased confidence, even after a morning where investors had appeared more confident about the repayment of loans.
“The fact that they widened after the Fed announcement showed that there is still some concern in the credit markets,” said David Kovacs, chief investment officer at Turner Investment Partners in Berwyn, Pa. “Even with all the work that the Fed has done, including cutting by 2 percent since the beginning of the year, even with that the risk is not over.”
Shares of financial firms, however, continued to surge in late trading as they recovered from a severe beating on Monday. Lehman Brothers, whose share price plummeted 19 percent a day earlier as rumors swirled that the bank was facing liquidity problems, gained back all its losses after reporting a 57 percent decline in net income for the first quarter. That figure beat expectations and restored some confidence in the company; its stock rose 46 percent, to $46.49.
Goldman Sachs reported a 53 percent earnings decline, also better than Wall Street estimates, and its shares rose 16 percent, to $175.59. MF Global, the commodities brokerage firm that plummeted in value on Monday, gained back 35 percent, to $8.17.
And Bear Stearns, which was valued at $2 a share in the weekend takeover by JPMorgan Chase, closed at $5.91, a 23 percent bounce from Monday’s close, as traders bet the company may be able to negotiate a better deal in the near future.
The Fed’s cut to its benchmark lending rate will lower the cost of mortgages, car loans, and other consumer transactions. But it can also lead to higher prices and a devalued dollar.
The yields on Treasury notes, some of which reached 50-year lows on Monday, climbed back on near- and short-term bonds. And commodities like oil and corn recovered from a sell-off a day earlier.
Commodities analysts said traders were responding to the more stable financial markets and continued to see firm fundamentals for future price gains in energy and agricultural commodities. They said the rebound in prices reflected hopes that strong actions by the Fed would avert a slowdown in the United States and reduce the possibility that a recession will douse increasing worldwide demand for energy, metals and food.
“It’s a mild recovery and it’s a logical response to yesterday’s hard sell-off. In general the fundamentals on many commodities remain sound despite jitters over global financial markets,” said Joel Crane, a commodities strategist at Deutsche Bank.
Crude oil gained to settle at $109.42 a barrel. Gold fell below $1,000 a troy ounce and the dollar gained ground against the euro, which settled at $1.5630.
The bounce on Wall Street followed strong sessions in foreign stock markets, which recovered on the strength of banks and financial services firms. The Nikkei 225 in Tokyo finished up 1.5 percent and Hong Kong’s benchmark Hang Seng index gained 1.4 percent.
In Europe, indexes in London, Paris and Frankfurt all closed more than 3 percent higher, a full recovery from Monday’s declines.
