Stocks rally after Fed says recovery remains slow, will provide support if it weakens

By Stephen Bernard, AP
Tuesday, September 21, 2010

Stocks climb after Fed holds off of buying bonds

NEW YORK — Stocks are rising after the Federal Reserve says it is prepared to provide additional support for the economy if needed.

Investors had been looking for signs that the Fed would be ready to step in and purchase Treasurys and mortgage bonds to help support the economy. The Fed’s statement left the door open for such action, but it held off on announcing specific new steps.

Economic reports over the past month have shown the economy continues to grow, but at a sluggish pace.

The Dow Jones industrial average is up 37, or 0.3 percent, at 10,790. The S&P 500 is up 1, or 0.1 percent, at 1,143, while the Nasdaq composite is down 1, or less than 0.1 percent, at 2,355.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

NEW YORK (AP) — Investors held back from making big moves in the stock market Tuesday as they waited to see if the Federal Reserve might take new actions to stimulate the economy.

The uncertainty has put a big September rally on hold before the central bank’s meeting wraps up Tuesday afternoon.

The Dow Jones industrial average fell 11.54, or 0.1 percent, to 10,742.15 in afternoon trading, a day after closing at a four-month high. The Dow has risen 12 of the past 14 days and is up more than 7 percent for the month.

The Standard & Poor’s 500 index slid 3.99, or 0.4 percent, to 1,138.72, while the Nasdaq composite index fell 6.76, or 0.3 percent, to 2,349.07.

Stocks have rallied throughout the month on signs that the economy continues to grow, even though the expansion remains sluggish. In the latest signal, the Commerce Department reported that construction of homes and apartments rose last month to the highest level since April. Building applications, a sign of future activity, also rose modestly in August.

The housing market remains weak even though new construction rose last month. The struggling market has been blamed, along with high unemployment, for keeping the economy from growing faster.

“We’ve seen the worst, but we’re going to scrape around the bottom,” said Leif Thomsen, CEO of Mortgage Master Inc. Thomsen said there are still millions of homes in or entering foreclosure that will need to be sold, which is likely to drag down the market.

Because the U.S. economy is still wobbly, some traders anticipate the Fed might at least hint at restarting programs like buying Treasurys and mortgage bonds to keep borrowing costs low.

“I think they’re going to move toward more stimulus,” said James Dailey, portfolio manager of the Team Asset Strategy Mutual Fund. “I wouldn’t be surprised if they announce something, but it would probably be incremental.”

A small increase in purchases of bonds is a more likely scenario than a sweeping new program because the stock market has surged this month and economic reports show continued modest growth, Dailey said.

Paul Zemsky, head of asset allocation at ING Investment Management, said if the Fed doesn’t make any move that would mean the central bank is more upbeat about the economy than it has been recently, but that might not be enough to keep stocks from falling.

“The history has been the market follows the action (of the Fed), not what they say,” Zemsky said. “So if the expectation is for action and we don’t get that today, we might get a bit of a pullback.”

Stocks have rallied throughout September, confounding predictions of a slump, as fears ebbed that the U.S. economy would fall back into recession.

If the Fed resumes buying bonds, interest rates could fall even lower, potentially driving investors seeking income to dividend-paying stocks. Investors can already get more dividend income from holding shares of major companies like Intel Corp., General Electric Co. and Home Depot Inc. than they can from the 10-year Treasury note.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.68 percent from 2.70 percent late Monday.

In corporate news, steep discounts and higher costs drove ConAgra Foods Inc.’s fiscal first-quarter profit lower. Shares of the company, which owns the Chef Boyardee and Peter Pan foods brands, fell $1.20, or 5.4 percent, to $21.17 in afternoon trading.

Cruise line operator Carnival Corp. reported a 22 percent jump in quarterly profits as demand was strong during the summer. It also raised its full-year earnings outlook well above analysts’ forecasts. Shares rose 12 cents to $37.18.

Clorox Co. said it would sell its car-care brands such as Armor All and STP to a private equity firm for $780 million in cash. Clorox shares fell 73 cents to $66.88 after announcing the sale of the division that had accounted for about 5 percent of its total revenue.

The dollar fell against other major currencies, while gold prices continued to hover near record highs.

About three stocks fell for every two that rose on the New York Stock Exchange where volume came to 414.1 million shares.

will not be displayed