US stocks surged Friday (August 17th) after the Federal Reserve stepped toward a possible cut in its key rate, and Wall Street tried to assess just how much its move would calm financial markets roiled by the drying-up of liquidity.The Dow Jones Industrial Average jumped 233.30 to 13079.08. It snapped a six-day losing streak and is now up 4.9% on the year.
The S&P 500 rose 34.67 to 1445.94, its biggest percentage gain since April 2, 2003. It is now up 1.9% year-to-date, after having been underwater earlier in the week. The Nasdaq Composite Index was up 53.96 to 2505.03, its biggest percentage gain since last August, putting it up 3.7% since the end of last year. Despite the rally Friday, all three indexes ended the week lower.
The Fed Friday morning cut its discount rate to 5.75% from 6.25%, offering cash-strapped banks and lenders a safety valve and lending a psychological boost to nervous markets.
Perhaps more importantly, the Fed also said it was worried about the potential for economic trouble caused by credit-market turmoil, saying it was "monitoring the situation." It left the door open for a possible cut in its target for the more-important federal funds rate down the road. "Monitoring [is a] code word [meaning] we're on guard at any moment, and if we have to we'll go in between meetings to change rates," said James Glassman, senior economist at J.P. Morgan Chase. "In their world, this is a very vast move. I think you have to leave open the possibility of an inter-meeting cut, but…I think they would rather not do it," preferring to wait until a scheduled September meeting or later. A lower funds rate would make borrowing cheaper and help stocks, but it can also fuel inflation.
The market rallied on the Fed move – stock futures had been down significantly before it was announced – though a good portion of the initial spike appeared to be a result of short-covering. Shares soon retreated from their opening highs, but finished with gains of around 2% on the major indexes. On the NYSE, advancers outnumbered decliners by more than six to one; trading curbs were in effect for a large part of the day.
Volatility in individual shares may have been exacerbated because of options expirations Friday, which can exaggerate moves both on the up side and the down side. Volatility as measured by the VIX index declined slightly from Thursday, but remained high by recent standards
"The Fed move was the catalyst" for stocks' gains, said Tony Dwyer, equity-market strategist at FTN Financial Research. "But at the end of the day, the market is cheap, earnings are solid and we have good fundamentals," so it isn't surprising that shares would have rebounded.
But many experts didn't expect to see much of a lasting effect on the markets. "I think it signals somewhat of a panic move by the Fed here, and I would not have too much faith in this rally," said Joe Ranieri, co-head of trading at Canaccord Adams. "We've got a little short-covering and a panic rally. Overall, nothing has really changed."
