Stocks Advance, Led by Techs

Investors Wednesday weighed a downbeat view of the economy from the Fed, data on inflation and housing starts, and a new record high for crude oil

by David Bogoslaw

Stocks closed higher Wednesday after reversing an earlier drop. Technology issues were among the session's best performers, aided by a strong earnings report from Hewlett-Packard (HPQ). Financial stocks rose later in the day, as minutes from Federal Reserve January policy meetings apparently supported hopes for further interest rate cuts. Stocks tied to precious metals and oil got a lift from gains in commodities futures, as crude oil topped the $100 mark once again to close at a new record.

Investors also digested reports showing worsening inflation risks and only slight improvement in the housing market.

On Wednesday, the Dow Jones industrial average finished higher by 90.04 points, or 0.73%, at 12,427.26. The broader S&P 500 index added 11.25 points, or 0.83%, to end at 1,360.03. The tech-heavy Nasdaq composite index gained 20.90 points, or 0.91%, to close at 2,327.10.

Activity in the broader market was positive, with 20 shares advancing in price for every 12 that declined on the New York Stock Exchange. Nasdaq breadth was 17-12 positive.

The Fed’s minutes to its January policy meetings showed heightened concerns over the economy, and policymakers said downside risks remain even after the 50 basis-point easing on Jan. 31. Board members noted that the data seen since December was "decidedly downbeat on balance". Fed officials believed that a fiscal stimulus package would support growth in the second half of the year, but some said it might not help in the near-term, when downturn risks are the largest.

The minutes said that while inflation data was also "disappointing," participants generally expected inflation to moderate somewhat. Many believed that the slowing in growth would ease price pressures. The Fed had also held a previously undisclosed meeting on Jan. 9, where "most officials" saw the potential for "substantial" easing. The minutes

indicated some concern from officials that the Jan. 22 easing would be seen as aimed at the stock market. The minutes said a "relatively low" real funds rate might be needed for a "time," but also noted the possibility for a "rapid reversal" of rate cuts if necessary.

Overall, the minutes indicated that the Fed seemed quite sanguine on inflation, notes S&P Economics, suggesting another cut at the Mar. 18 FOMC meeting, possibly 50 basis points.

"We continue to expect the Fed to act to mitigate downside growth risks as long as it does not lead to a significant worsening of the medium-term inflation outlook," wrote Lehman Brothers economist Drew Matus in a note Wednesday. "We expect a 50 basis

point rate cut at the March FOMC meeting and look for a terminal Fed funds rate of 2.0% by the middle of the year."

Leading Wednesday’s economic data, U.S. housing starts rebounded 0.8% to an annualized rate of 1.012 million in January after a downwardly revised 14.8% decline in December. Permits dropped another 3.0%, extending the string of declines since last May. Multi-family starts bounced back 22.3% after a 39.2% decline in December, demonstrating volatility that isn't unusual for this sector, Action Economics said.

The U.S. consumer price index rose 0.4% in January, slightly more than an expected 0.3% gain. The core index, which excludes food and energy costs, climbed 0.3%, vs. an anticipated 0.2% increase. Retail energy prices were up 0.7%, with gasoline prices jumping 1.2%, and food prices increased 0.7%. Pushing up the core index was a 0.3% rise in shelter, a 0.4% gain in apparel and a 0.5% hike in medical costs, as new-year prices increases appeared to provide for strength on the month.

The headline CPI is now 4.3% higher than a year ago, up from a 4.1% year-over-year pace in December, while the core inflation rate year-over-year rose from 2.4% to 2.5% in January.