NEW YORK, March 21 (Reuters) - Bolstered by the Federal Reserve's aggressive
liquidity action, U.S. stocks could extend their solid rally next week even in
the face of still weak consumer and housing-related data.
Thursday, the Dow Jones industrial average .DJI soared 261.66 points, or 2.16
percent, to end at 12,361.32, capping one of the most volatile weeks in U.S.
financial market history. The Standard & Poor's 500 Index .SPX also enjoyed
ample gains at the end of a holiday-shortened week, climbing 31.09 points, or
2.39 percent to end the week at 1,329.51. The Nasdaq Composite Index .IXIC
jumped 48.15 points, or 2.18 percent, to close at 2,258.11. The financial
markets will be closed for Good Friday.
"This will be the bottom," said Mark Zandi, chief economist and co-founder of
Moody's Economy.com. "We got an incredibly aggressive Fed and three to five
years from now, we will realize that this was the start of a bottoming process."
Stock investors already have been quick to sniff that out.
For the holiday-shortened week, the Dow jumped 3.43 percent, the S&P 500 rose
3.21 percent and the tech-heavy Nasdaq Composite gained 2.06 percent.
Next week's barrage of economic indicators will include home sales, durable
goods orders, consumer confidence and spending, GDP and some widely watched
gauges of inflation.
But investors are likely to shake off these readings.
"There's a lot of bearishness built into expectations, so the markets could
respond positively if we get any better-than-expected news from these economic
reports," said Keith Wirtz, president and chief investment officer of Fifth
Third Asset Management, which manages $22.5 billion.
Overall, it was the Fed's aggressive moves that have made investors
increasingly confident about the stability of the markets.
"What the Fed did on multiple fronts will be an important moment in time for
equity investors," Wirtz said. "The Fed was trying to blunt what could have
been a snowballing effect of a lack of faith in the financial system," he said.
FINANCIALS FLY, AND SO WILL STOCKS
Sunday, the Fed brokered a deal for JPMorgan Chase & Co. (JPM.N: Quote,
Profile, Research) to take over Bear Stearns (BSC.N: Quote, Profile, Research),
but it also dusted off a Depression-era rule to let securities firms borrow
directly from the Fed through its discount window, usually reserved for
commercial banks.
Now any bank that needs cash can go directly to the Fed window and exchange all
kinds of collateral, such as mortgage bonds, for highly liquid government
securities. With those Treasuries, banks then tap the $4.5 trillion repurchase
market to exchange these for short-term cash loans. That money can shore up
balance sheets depleted by the plunge in prices of mortgage-backed securities
and other risky investments.
That's not all.
On Tuesday, the Fed cut interest rates by three-quarters of a percentage point,
the sixth time it has slashed its fed funds rate target for overnight bank
loans, to 2.25 percent.
Moreover, the regulator of Fannie Mae and Freddie Mac, the top providers of
funding for U.S. residential mortgages, relaxed their capital rules and gave
them permission to pump $200 billion more into the struggling U.S. mortgage
market.
Proof that the Fed's medicine is taking effect?
Financial stocks and the broader market broke their three-week losing streak.
Lehman Brothers (LEH.N: Quote, Profile, Research) and JPMorgan both rose for
the week by 24 percent and 26 percent, respectively. Goldman Sachs (GS.N:
Quote, Profile, Research) shares posted gains of 14.52 percent for the week.
"The market has received a lot of support and it should help thaw the frozen
credit markets, which could help this market," said Alan Gayle, senior
investment strategist at Trusco Capital Management in Atlanta.
SOME GOLDEN OPPORTUNITIES
Like many investors, Wirtz of Fifth Third said he is buying U.S. stocks.
"We are starting actually to buy equities this week," he said. "They've got to
distressed valuations and the opportunities were too great to ignore."
Bob Doll, vice chairman and global chief investment officer of equities at
BlackRock Inc, which manages more than $1.1 trillion in assets, told Reuters
that he believes the bottom is in the making and added that he's been buying
financial stocks "on weakness."
As for weakness in economic data, there will be pockets. Existing home sales
for February, due on Monday, are expected to slip to an annual rate of 4.85
million units from 4.89 million the previous month, according to economists
polled by Reuters. New home sales, due on Wednesday, are likely to dip to an
annual rate of 580,000 units in February from January's rate of 588,000, the
poll showed.
Investors will be watching closely on Friday, when the core PCE price index,
the Federal Reserve's preferred measure of inflation, will be released as part
of the report on personal income and consumption. (PCE, of course, stands