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By Jason Simpkins
Although Federal Reserve policymakers failed to offer any signs of an interest-rate reduction at their meeting Tuesday, investors shrugged off their disappointment and enabled U.S. stocks to rebound from deep losses and finish well into positive territory.
Stocks repeated that pattern yesterday (Wednesday), zig-zagging to a triple-digit close.
During Tuesday's trading session, the Dow Jones Industrial Average gained 35.52 points, or 0.26%, to close at 13,504.30. The 30-stock index had spiked as high as 102 points after the decision. But Tuesday's wild ride marked the first time since July 30 that the Dow hasn't closed with a triple-digit gain or loss. The Standard & Poor's 500 index rose 9.04 points, or 0.6%, to finish the day at 1,476.71. And the tech-laden Nasdaq composite index rose 14.27 points, or nearly 0.6%, to finish the day at 2,561.60.
Then yesterday (Wednesday), according to preliminary estimates, the Dow soared 153.47 points, or nearly 1.15%, to close at 13,657.77. The Nasdaq jumped more than 2%, climbing nearly 51.4 points to close at 2,612.98. The S&P 500 rose 1.4%, adding nearly 21 points to close at e Standard & Poor's 500 index rose 20.77, or 1.41 percent, to 1,497.48.
Yesterday's Market Action
But the continued volatility – a late-day plunge and last-minute recovery – seemed to again highlight how concerned investors are about the growing credit problems in the U.S. economy, and how those problems could blunt corporate earnings growth, despite the Fed's soothing words.
The Dow rocketed nearly 200 points in early trading yesterday, but then dropped down into negative territory in the last half hour of trading – apparently because of rumors that investment banker Goldman Sachs Group Inc. (NYSE: GS) was going to release some very bad news. When that market scuttlebutt proved unfounded, the Dow still had time to reverse course and rebound to finish with the gain of more than 150 points.
Institutional investors weren't ready to label the two-day gain of nearly 190 points as any kind of victory, or the start of an uptrend, however.
"It's hard for me to envision that all the potential problems with subprime have been resolved in two days," John O'Donoghue, co-head of equity investing at Cowen & Co. told The Associated Press. "We'll have to see how the dust settles here in the next few days … I don't think the market has made up its mind what it wants to do."
The Federal Reserve on Tuesday opted to leave rates unchanged, and instead took the opportunity to underscore once again that inflation remains its main concern. That was the ninth-straight meeting of the policymaking Federal Open Market Committee (FOMC) in which the central bankers left its key policy lever unchanged. The short-term benchmark Federal Funds rate will remain at 5.25%, where it has stood for more than a year.
"Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," the central bank's policymaking Federal Open Market Committee (FOMC) said in its statement.
Some investors had held out hope that in light of ailing credit markets the Fed might soften its stance on interest rates and show some inclination towards a potential cut.Â However, the Fed's determination to stand idly by in spite of rampant market fluctuations at least initially sent investors running for cover.Â That made it clear that the Fed was holding interest rates steady – and had failed to assuage fears concerning the credit market – and sent the Dow plunging 161 points.
With respect to the problems facing the economy, the Fed stated, "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing."
Despite all of this however, the Fed still believes the economy will continue to expand at a "moderate pace," thanks to growth in employment and a "robust global economy." The U.S. economy grew at an annual rate of 3.4% during the April-June quarter. But many economists are forecasting a more-subdued growth rate in the range of 2.25%-2.5% for the rest of the year.Â Â Â
For the Fed to say that markets have been volatile is an understatement.Â In the past two weeks the Dow has fluctuated a total 1,647.95 points. However, as of Monday's close, the total net change was only 248 points to the downside. Tuesday's trading was equally erratic. The Dow started the day down 0.71% from Monday's close, before posting a 69-point rally. Then it sank back down 50 points, all before 11 a.m.
The index hit its low for the day when it landed at 13,355.14 after the Fed's statements. It got its bearings back quickly, and shot up to its Tuesday high of 13,599.82.