U.S. Stocks Finish Higher As Bernanke, Bush Calm Market
NEW YORK (MarketWatch) -- U.S. stocks ended higher Friday, buoyed by a proposal by President Bush to help subprime homeowners and a speech by Federal Reserve Chairman Ben Bernanke, who did not dispel beliefs that a rate cut will come in September.
"Bernanke and Bush were the highlights of the day with the former reminding the markets that the Fed is not out of touch and the latter offering some proposals on how to mitigate some of the problems facing homeowners," said Drew Matus, U.S. senior economic at Lehman Brothers Inc.
"We continue to expect a 25-basis-point rate cut at the Sept. 18 FOMC [Federal Open Market Committee], followed by another at the October meeting," Matus said.
The Dow Jones Industrial Average closed 119 points higher, giving it a weekly gain of nearly 1.2% and a monthly gain of 1.1%. Of the Dow's 30 components, 27 finished higher, led by Home Depot Inc. , which gained 3.4%, and Hewlett-Packard Co. , up 1.9%.
The S&P 500 rose 16.35 points at 1,473.99, giving it a weekly loss of 0.4% and a monthly gain of 1.28%.
The Nasdaq Composite closed up 31.06 at 2,596.36, a weekly gain of 0.7% and a monthly hike of 1.1%.
Trading volume on the New York Stock Exchange came to nearly 1.4 billion ahead of the long holiday weekend, with advancing stocks ahead of decliners 7 to 1. On the Nasdaq, volume topped 1.5 billion shares, with advancing stocks ahead of declining issues more than 2 to 1.
Fed ready
In a speech at the central bank's yearly conference in Jackson Hole, Wyo., Bernanke declared the Fed ready to act as needed to prevent harm to the U.S. economy.
Investors scrutinized the Fed chief's comments in an attempt at measuring whether Fed policymakers are leaning toward a cut in the federal funds rate, which still stands at 5.25%. The financial futures markets expect one or possibly two rates cuts by the end of September.
In Washington, Bush unveiled several steps aimed at helping subprime mortgage borrowers keep their homes, including refinancing into government-insured mortgages, while calling the subprime woes "modest" in relation to the overall economy.
Bernanke "is steering a very good middle ground," said Jim Awad of WP Stewart Asset Management. "He's telling Wall Street what it should want to hear," while "holding back on a general interest rate cut so investors can't feel they can speculate with impunity."
As for the White House plan to expand FHA protection to troubled borrowers, "Wall Street came to the conclusion that it can't hurt, it might help somewhat, and on balance it's a positive," Awad said.
Active stocks
Financial stocks rallied, boosted by President Bush's proposal to expand the role of the federal government to stem a wave of mortgage defaults. Dow components Citigroup Inc. gained 1.4% and J.P. Morgan Chase & Co. rose 1.3%.
Stocks on the move included Dell Inc. , which fell almost 1% after the world's No. 2 computer maker reported a 2.3% profit rise and a 5% revenue gain, topping expectations.
Shares of Accredited Home Lenders gained 43% after private-equity suitor Lone Star Funds said in a letter it's willing to offer a revised price of $214 million, or $8.50 a share, to acquire the troubled lender.
Economic data
Beyond Bush and Bernanke, several economic reports were released, with the Commerce Department reporting milder-than-expected inflation in July along with slightly better-than-anticipated growth in consumer incomes and spending.
The data "are consistent with third-quarter consumption growth in excess of 2%, in our view, making expectations for a near-term recession even more unlikely," Lehman economist Matus told clients.
"It is doubtful that the Fed would be 100% satisfied with a 1.8% reading for core inflation, but it is probably good enough in the current context to give policymakers a green light to do what they think i necessary to shore up the economy," said Stephen Stanley, chief economist at RBS Greenwich Capital.
In a separate report, the Commerce Department said orders for U.S.-made factory goods climbed 3.7% in July, a showing slightly better than anticipated.
Another economic measure, on consumer sentiment, had the University of Michigan and Reuters reporting a drop in their index to 83.4 last month from 90.4 in July.
And, a survey of corporate purchasing managers illustrated ongoing expanded business activity in the Chicago region in August. The Chicago purchasing managers index came in at 53.8%, relatively flat with July's 53.4%. The new orders index climbed to 58.4% vs. 53.4% in July.
Other markets
In commodities trading, crude oil for October delivery closed at $74.04 a barrel in New York, up 68 cents for the session and 4.1% from a week ago.
Gold and other metals futures rose sharply, with gold for December delivery climbing $8 to stand at $681.90 an ounce on the New York Mercantile Exchange.
In bonds, the benchmark 10-year Treasury note, a reference for mortgage and corporate borrowing, was down 4/32 at 101 25/32 with its yield at 4.53%.
And in currencies, the dollar fell against the Japanese yen.
By Kate Gibson