Stock market investors warmly embraced President Bush's selection of Ben S. Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve, sending the Dow Jones industrial average up 169.78 points, or 1.7 percent, the biggest rally in six months. Broader stock market gauges also closed higher on Monday.
Bond prices and the dollar fell, indicating some concern that Bernanke will lean more toward promoting economic growth through lower interest rates rather than directing all his attention toward fighting inflation. Rising inflation hurts bonds because it erodes the value of their regular interest payments. It also reduces the value of the dollar.
"The stock market wanted a known quantity, and that's what it got with Bernanke. That was especially important after some other recent Bush appointments appeared to come out of left field," said Russell Lundeberg, chief investment officer at Barrett Capital Management in Richmond. "And it seems like the feeling is he won't continue to raise rates quite as much" as Greenspan or another Fed chairman might have, Lundeberg said.
Wall Street also embraced the noncontroversial nature of the Bernanke nomination, coming as it does after Harriet Miers, Bush's latest choice for a Supreme Court seat, has run into trouble on Capitol Hill. Market strategists say Bernanke is widely viewed as nonpolitical.
"Particularly with the Miers thing going on now, people are going to be very happy with this selection," said William Larkin, fixed-income portfolio manager at Cabot Money Management. "There is not going to be a lot of screaming."
Stock prices, already rising Monday on good earnings reports and lower oil prices, spiked further when rumors of the Bernanke announcement began circulating across trading desks. Many Wall Street traders hope the appointment will be the catalyst the market needs to shrug off a dismal October and stage its traditional fourth-quarter rally.
Monday's early advance held up after the official announcement of Bernanke's nomination and gained steam through the afternoon. The broad Standard & Poor's 500-stock index closed at 1199.38, up 19.79 points, or 1.7 percent. The Nasdaq Stock Market composite index, dominated by technology shares, rose 33.62 points, or 1.6 percent, to close at 2115.83. The rally lifted 28 of the 30 stocks in the Dow and 457 stocks in the S&P 500.
The price of the benchmark 10-year Treasury note fell while its yield, which moves in the opposite direction, rose to 4.45 percent. The dollar dropped against the euro and the Japanese yen.
Bond traders and strategists said Monday's drop in Treasury prices did not indicate that the fixed-income market lacks faith in Bernanke's ability to thread the policy needle between promoting growth and fighting rising prices by controlling the money supply. Instead, they said, the reaction indicated a cautious approach as bond investors comb through Bernanke's academic writings to get a clearer sense of his approach.
"I've seen two things from [bond sellers] today, one labeling Bernanke a hawk on inflation, one labeling him a dove," said Christopher J. Mahony, who manages bond portfolios at investment firm J. & W. Seligman & Co. "So there is some concern about just exactly what we are getting here. The market doesn't like change and it doesn't like uncertainty, and there is at least little bit of both here."
Overall, Wall Street strategists praised Bush's choice. David R. Kotok, chairman and chief investment officer at Cumberland Advisors, said Bernanke had established strong academic credentials, especially in the area of balancing inflationary and deflationary pressures.
"If anything he will have a bias against a policy error that could risk serious recession or worse," Kotok said. "In the times we are in, which include shocks like high energy prices and a current account deficit that amounts to 7 percent of gross domestic product, it is better to have a centrist who is not a rigidly hard-line, doctrinaire anti-inflation hawk."
Merck, a Dow component, rose 82 cents, to $27, after the drugmaker's profit rose 7 percent because of lower costs.
Schering-Plough rose 2 cents, to $21.13, after its profits tripled in the third quarter on strong product sales, including the allergy drug Nasonex.
Cendant fell $1.32, to $18.77. The company said it will split itself into four separate publicly traded companies. One will run the Ramada and Howard Johnson hotel chains, one will take over its Orbitz.com and other travel businesses, and the other two will operate its rental car and real estate units, respectively.
Morgan Stanley gained $1.30, to $53.40, after the Wall Street firm announced plans to buy AMLI Residential Properties Trust, a real estate acquisition and management firm, for $2.1 billion. AMLI surged $6.25, or 20 percent, to $37.52.
New York Stock Exchange composite index rose 120.04, to 7374.53.
American Stock Exchange index rose 23.18, to 1621.17.
Russell 2000 index of smaller-company stocks rose 13.87, to 646.60.
NYSE: 2.19 billion shares, down from 2.45 billion on Friday. Advancers outnumbered decliners 3 to 1.
Nasdaq: 1.57 billion shares, down from 1.8 billion. Advancers outnumbered decliners 5 to 2.
Crude oil for December delivery: $60.32, down 31 cents.
Gold for current delivery: $465 a troy ounce, down from $467 on Friday.