NEW YORK (CNNfn) - U.S. equity markets rallied Tuesday as strength in select technology and blue chip issues, in conjunction with a widely anticipated half-percentage-point cut by the Federal Reserve, trumped worries about continued market weakness.|
The U.S. central bank cut its target for the federal funds rate to 2.5 percent from 3.0 percent, hitting an almost 40-year low, representing the ninth cut this year and the second since the terrorist attacks Sept. 11.
Markets initially gave the news the cold shoulder, with the Dow Jones industrial average falling as much as 30 points.
But markets then regained lost ground and continued to rally in afternoon trading. The Nasdaq composite index closed up 11.83 to 1,492.29. The Dow Jones industrial average soared 113.76 to 8,950.59. The S&P 500 closed up 12.78 to 1,051.33.
"A lot of people anticipated the rate cuts, but the fact that the markets ended up rising after that is definitely a good sign," Subodh Jumar, chief investment officer, CIBC World Markets, told CNNfn's Street Sweep.
As quarterly results are expected to continue to come in on the weak side, investors may take comfort in the fact that the Fed left the door open for further cuts.
"There wasn't anything that the Fed said or did to imply that the easing cycle was over," Michelle Girard, treasury market strategist, Prudential Financial, told CNNfn.
The market enjoyed a modest rally for most of the day, partly in anticipation to the Fed's action. However, some analysts argued that the markets were stronger on military and politically related issues, rather than anything the Fed might do. Recent developments regarding retaliation for the Sept. 11 terrorist attacks also helped boost aerospace stocks, capped by Boeing's news of a potentially $1.6 billion deal with China.
Market breadth was positive. On the Nasdaq Composite, advancers topped decliners 3-to-2 as 1.77 billion shares changed hands. On the New York Stock Exchange, winners bested losers by more an almost 2-to-1 margin as 1.26 billion shares traded.
Tokyo's Nikkei index finished higher Tuesday for the fourth straight session. European stocks closed lower on weakness in airline and media stocks. Treasury prices rallied on the news. The dollar gained against the yen but edged down versus the euro.
After the close of trade, telecommunications company Nortel Networks (NT: down $0.18 to $5.29, Research, Estimates) warned that it expects third quarter revenue to come in nearly $500 million below current expectations.
Compaq weighs on hardware makers
Many techs ended the day in positive territory, following the brief, but jagged, drop after the Fed news, with the particular exception of semiconductors. The main culprits behind the Nasdaq's brief downturn were unable to back off those losses by the close.
Computer software, internet security, defense names and biotechnology shares managed to hold onto earlier gains.
Cisco (CSCO: down $0.42 to $11.48, Research, Estimates), Intel (INTC: down $0.47 to $19.54, Research, Estimates), and Sun MicroSystems (SUNW: down $0.12 to $8.01, Research, Estimates) held back the Nasdaq from more fully joining the broader rally.
Compaq Computer (CPQ: down $0.17 to $8.16, Research, Estimates) pulled down its buyout partner Hewlett-Packard (HWP: down $0.35 to $15.25, Research, Estimates) after it said late Monday that it expects to report a third-quarter loss rather than the profit analysts had forecast.
BE Aerospace (BEAV: up $3.08 to $11.73, Research, Estimates) said it could have a cockpit security system in place by 2002.
Software makers showed particular gains amongst the techs, while chips slid, with the Philadelphia Semiconductor index falling 2.8 percent on the day.
Web site management software maker Mercury Interactive (MERQ: up $3.52 to $22.26, Research, Estimates) rose despite saying its third-quarter earnings per share will miss estimates. Rivals Autodesk (ADSK: up $1.14 to $32.14, Research, Estimates) and Rational Software (RATL: up $0.82 to $9.56, Research, Estimates) also gained.
Networking software maker Inktomi (INKT: up $0.61 to $3.31, Research, Estimates) affirmed its previous fourth-quarter guidance.
Internet Security Systems (ISSX: up $1.47 to $13.55, Research, Estimates) continued to rise on Monday's affirmation of previous guidance. Sector mates Symantec (SYMC: up $3.29 to $38.07, Research, Estimates) and CheckPoint Software (CHKP: up $2.05 to $22.85, Research, Estimates) joined in.
Business software makers did well. Bear Stearns initiated coverage of BEA Systems (BEAS: up $0.79 to $10.08, Research, Estimates) with a neutral. And no news was good news for Siebel Systems (SEBL: up $2.01 to $15.06, Research, Estimates). At its analysts' meeting, the company's CEO concluded his speech without saying anything about the third-quarter results.
Telecommunications equipment maker Comverse Technology (CMVT: down $1.71 to $18.00, Research, Estimates) fell after the stock was downgraded by Merrill Lynch. Qwest Communications (Q: down $0.90 to $15.60, Research, Estimates) also suffered a downgrade.
Drugstore chain Rite Aid (RAD: down $0.49 to $7.15, Research, Estimates) reported a narrower fiscal second-quarter net loss due to strong sales of consumer staples, such as toothpaste and cosmetics.
McGraw-Hill Cos. (MHP: down $6.40 to $50.50, Research, Estimates) fell on news that the publishing company will miss expectations on third-quarter and full-year earnings.
Ballard Power Systems (BLDP: up $4.02 to $22.94, Research, Estimates) rose on news regarding its partnership with Ford (F: up $0.56 to $17.80, Research, Estimates) and DaimlerChrysler (DCX: up $1.36 to $32.26, Research, Estimates). The automakers will raise their stake in the energy company and have enlisted it in a 20-year fuel cell development pact.
Airline stocks such as Northwest Airlines (NWAC: up $0.29 to $13.03, Research, Estimates) and Continental Airlines (CAL: up $1.62 to $17.39, Research, Estimates) were up after Merrill Lynch upgraded Delta Air Lines (DAL: up $1.30 to $27.09, Research, Estimates) and Goldman Sachs added SkyWest (SKYW: up $1.39 to $18.56, Research, Estimates) to its "recommended list."
Wal-Mart, Boeing boost the Dow
Of the three major indexes, the Dow showed the most dramatic volatility, however, closing more than 113 points higher on the day, after falling as much as 30 points following the Fed news.
Boeing (BA: up $1.85 to $34.25, Research, Estimates) was a point of strength on the Dow after the company announced an agreement to sell 30 commercial 737 aircraft to China in a $1.6 billion deal, lifting sector mates like Lockheed Martin (LMT: up $1.39 to $45.00, Research, Estimates).
United Technologies (UTX: up $1.71 to $48.96, Research, Estimates), Alcoa, Caterpillar, IBM, and Microsoft were the Dow's other big winners.
However, Johnson & Johnson (JNJ: down $0.43 to $54.99, Research, Estimates) weighed on the Dow after the health-care products manufacturer was downgraded by UBS Warburg. General Motors (GM: down $0.18 to $42.95, Research, Estimates) dipped on sharply lower September sales.
Wal-Mart Stores (WMT: up $2.24 to $52.00, Research, Estimates) rose on news that the world's largest retailer will open 180-to-185 "super centers" next year, citing strong results from the format, lifting shares of Home Depot (HD: up $1.23 to $39.05, Research, Estimates).