Dow soars 429 points after Fed makes new pledge on rates

The Dow Jones industrial average surged Tuesday, ending a volatile session up nearly 430 points after the Federal Reserve pledged to keep short-term interest rates near zero for at least two more years.

The blue-chip index gyrated throughout the session as investors weighed the implications of the Fed's surprise move. But buyers flooded into battered stocks in the final hour.

The Dow closed up 429.92 points, or 4%, to 11,239.77, its biggest gain of the year.

The central bank's statement after its midsummer meeting helped energize investors looking for any scrap of good news after a global rout in stocks since Standard & Poor’s downgraded the U.S. credit rating late last week. On Monday, the Dow fell a stunning 635 points, or 5.6%, its worst decline since the financial-system meltdown in 2008.

Many analysts said the market was primed to bounce after deep losses over the last two weeks on fears over the fading economic recovery.

What's more, some noted that the Fed's new pledge on interest rates came as policymakers downgraded their expectations for the economy in the short run. That could cause some investors to reconsider how smart it may be to stay in stocks for the time being.

The Fed said it “now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting.”

Also, the Fed's decision on rates drew dissents from three members of the policymaking committee, a sign of fracturing views within the central bank.

Still, the bulls had control late Tuesday. The Standard & Poor’s 500 soared 53.07 points, or 4.8%, to 1,172.53. The tech-heavy Nasdaq composite jumped 124.83 points, or 5.3%, to 2,482.52.

With Tuesday's rebound, the Dow is down 2.9% year to date, the S&P 500 is down 6.8% and Nasdaq is off 6.4%.

Some investors rushed to lock in yields on longer-term Treasury bonds after the Fed statement, with short rates now likely to remain at rock bottom "at least through mid-2013," according to the Fed.

In theory, if businesses and investors believe that short-term rates won't rise for at least two years, they would have more incentive to do something potentially more productive with their money than keep it in bank accounts earning nothing. That could include investing in longer-term Treasury, corporate and municipal bonds.

The 10-year T-note yield fell to 2.25% from 2.34% on Monday. At one point the yield fell as low as 2.10%. The five-year T-note sank to 0.99% from 1.08%.

-- Joe Bel Bruno and Tom Petruno

Dow Jones Down: US stock markets slump after rating downgrade

Dow Dives 600 Points As Market Re-Rates U.S. Growth Outlook

Aug. 8 2011 - 4:05 pm

Standard & Poor’s Friday downgrade of the U.S. credit rating sparked the expected selloff in New York Monday, but the depth and ferocity of the nosedive was also driven by a fundamental rethink of America’s economic growth.

The rate of U.S. growth “is being rapidly discounted by the market,” says John Richards, head of market strategy (Americas) at RBS, ahead of analysts taking down their expectations.

That contributed to the massive slide that had the Dow Jones industrial average down 634 points, or 5.5%, at 10,811 by the closing bell. The S&P 500 and Nasdaq lost more than 6.7% and 6.9% respectively, with the former off 80 points to 1,120 and the latter 175 points to 2,358. The Russell 2000, a growth-focused index, slumped 7.9%.

Part of the trouble is that many took their eye off the ball during the acrimonious negotiations leading up to last week’s deal to raise the debt ceiling. “We got so focused on the negotiations and the outside possibility of default that we froze and people just stayed on base,” Richards says.

Now, with the debt ceiling issue resolved, at least for now, traders are switching the focus back to the faltering economic outlook. Last week’s July jobs report was improved from June’s dismal reading, but hardly cause for celebration.

President Obama addressed S&P’s downgrade in a press conference at the White House Monday, arguing that America’s issues are solvable and that the cut represents a question of whether the U.S. has the political will to make tough choices on deficits and spending, not whether the Treasury can pay its creditors.

The European debt crisis also remains a factor, but Richards believes the European Central Bank’s move to buy Italian and Spanish bonds is a positive development that was brushed aside Monday as investors streamed for the exits. “It’s a big move, and we think it should be more appreciated by the stock market,” he said.

That certainly was not the case Monday as traders continued a wave of indiscriminate selling that had almost 95% of NYSE and Nasdaq-listed stocks in the red. Despite S&P’s Friday downgrade, U.S. Treasuries remained a desirable safe haven, with the 10-year yield diving to 2.34%. Investors were also lusting after gold, sending the yellow metal to fresh nominal highs above $1,700 an ounce. Oil prices have tumbled as global growth expectations dim, with crude falling to $81.63 a barrel.

Bank of America was among the session’s worst performers, with shares being dumped amid a surge in volume. The bank is facing a $10 billion lawsuit from American International Group over mortgage-backed securities tied to its Countrywide and Merrill Lynch units. BofA’s stock was down a stunning 20.1%.

McDonald’s which reported 5.1% same-store sales growth for July earlier Monday, was down 3.4%.