By Ylan Q. Mui Washington Post Staff Writer
Thursday, November 4, 2010; 10:36 PM
U.S. stock markets surged Thursday after an aggressive move by the Federal Reserve to shore up the nation's economy, even as retailers reported consumer spending remains tepid.
The blue-chip Dow Jones industrial average and the broader Standard & Poor's 500-stock index jumped 2 percent, making up their losses since the financial crisis struck in September 2008. The Dow closed at 11,434.84, up nearly 2 percent and the tech-heavy Nasdaq rose 1.5 percent.
Stocks began to creep upward on Wednesday afternoon when the Fed announced that it would spend $600 billion to buy Treasury bonds over the next eight months in an effort to lower long-term interest rates and boost economic activity.
The move also sent commodities prices to some of the highest levels in years, as investors bet that the Fed's decision would lead to higher global demand.
The price of crude oil jumped 2 percent to $86.49, a six-month high, and cotton soared 3.6 percent to an all-time high.
Although the Fed's action had been widely anticipated, its impact had not been fully priced into the market, said Lawrence Creatura, portfolio manager and equity market strategist for Federated Investors.
Investors "had not assimilated that into their thinking or their expectations," he said.
Investors also flocked to stocks as the yields on long-term government bonds fell on the Fed's announcement. Rates on five-year bonds plunged 0.08 percentage points to 1.03 percent. Rates on 10-year Treasurys fell 0.08 percentage points to 2.49 percent. The falling rates helped push down the average overnight interest rate on a 30-year fixed-rate mortgage to 4.24 percent from 4.3 percent a week ago.
Lower interest rates helped propel home builders and automakers to big gains on Thursday. Shares of D.R. Horton and KB Homes spiked more than 8 percent, while car manufacturer Ford jumped 4.5 percent and Toyota rose 3 percent.
"Chairman Bernanke has got to feel pretty good about at least the initial effect," said Eric Mintz, assistant portfolio manager at Eagle Asset Management.
Global markets also rallied on the Fed's announcement, with all major indexes posting gains on Thursday. London's FTSE 100 jumped 2 percent, and Japan's Nikkei 225 rose 2.2 percent. Hong Kong's Hang Seng index increased 1.6 percent.
"We're driving the world," said Scott Marcouiller, chief technical market strategist for Wells Fargo Advisors.
Bank stocks posted significant gains after media reports stated the Fed will soon allow healthy banks with strong capital levels to increase dividend payments. Shares of Bank of America and J.P. Morgan were both up over 5 percent on Thursday; Wells Fargo gained 4 percent.
The gains in the market came despite mixed news from retailers. The International Council of Shopping Centers reported that sales at some of the nation's biggest chain stores rose 1.6 percent in October compared with a year ago. That represents the smallest gain since April.
Many retailers blamed unseasonably warmFe weather early in the month for the lackluster returns, and the ICSC estimated that the weather depressed sales by about 1 percent. Luxury retailers continued their recovery with a 6.4 percent increase, the biggest of any sector. But discounters rose a meager 1.2 percent.
The group predicted that colder weather along with pent-up demand could boost November sales by 3 to 4 percent. But many economists say that consumer spending is unlikely to return to pre-recession levels until the job market returns.
That's why investors and consumers will be focused on monthly unemployment figures slated for release on Friday as a barometer of the nation's recovery. A Dow Jones newswire survey showed many economists expect the labor report will show the nation added 60,000 jobs in October.
Whether or not the government report matches forecasts, the Fed's actions will continue to ease investors' minds, Marcouiller said.
"It almost seems to me it sets up as a win-win situation tomorrow," he said.
Staff writer Steven Mufson contributed to this report.