Stocks cut losses on Fed's economic stimulus plans

Stocks cut losses after Fed announces plans to buy government debt to stimulate economy

Stephen Bernard, AP Business Writer, On Tuesday August 10, 2010, 3:52 pm


NEW YORK (AP) -- The stock market had a cautious comeback Tuesday after the Federal Reserve calmed investors' nerves by announcing it would take small steps to stimulate the economy.

The Dow Jones industrial average, down about 100 points before the Fed announced its plans, recovered to a loss of 31. The other major market indexes also bounced back from their lows. But losing stocks were ahead of advancers on the New York Stock Exchange. And stocks considered safe bets, such as health care and consumer products companies, were among the gainers.

The Fed, in a statement issued after its policy meeting, said it will use money from its investments in mortgage securities to buy government debt on a small scale. That could help send long term rates on mortgages and corporate debt slightly lower. Investors saw the moves as a sign that the Fed is willing to step in, but that it doesn't view the economy as needing more dramatic action right now.

News that the Fed would be buying government debt, and in the process reduce the supply of Treasury issues on the market, sent Treasurys higher. The yield on the government's 10-year note, which moves in the opposite direction from its price, fell to 2.78 percent from 2.82 before the announcement.

Investors looked past the Fed's assessment of the economy that was included in the statement although it was bleaker than the central bank's view of the economy in June.

The Fed said, "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

Robert Pavlik, chief market strategist at Banyan Partners LLC in New York, said stocks recovered because the Fed's statement "tells the market that the Fed is on top of the situation and if some additional forms of quantitative easing are necessary down the road, it looks like the Fed is ready to act."

The fact that investors weren't more enthusiastic wasn't surprising, because the Fed's moves are small and not likely to turn the economy around quickly. John Merrill, chief investment officer of Tanglewood Wealth Management in Houston, said, "Stocks could move down in a day or two. It won't take much to move traders in the opposite direction."

The Fed cut back on its stimulus programs, which also included buying government debt, when the economic recovery was gaining momentum earlier this year. In its statement Tuesday, the Fed cited continuing high unemployment and constrained consumer spending among the reasons why it expects the economic recovery to be more modest.

Shortly before the close, the Dow was down 31.49, or 0.3 percent, at 10,667.26. The Standard & Poor's 500 index was off 3.51, or 0.3 percent, at 1,124.28. The Nasdaq composite index was down 22.12, or 1 percent, at 2,283.57.

Two stocks fell for every one that rose on the NYSE, while volume came to a light 798 million shares.

Stocks that traders call defensive, or that are expected to hold up even in a weak economy, were the market's best performers after the Fed decision. That was another sign that investors weren't euphoric about the Fed's moves.

Health care stocks were among the market leaders. Merck & Co. rose 47 cents, or 1.3 percent, to $35.83. Eli Lilly & Co. rose 91 cents, or 2.5 percent, to $37.87.

Consumer products makers also rose. Colgate Palmolive rose $2.01, or 2.6 percent, to $78.28, while Procter & Gamble Co. rose 65 cents, or 1.1 percent, to $61.03.

Overseas, Hong Kong's Hang Seng index fell 1.5 percent, while Japan's Nikkei stock average fell 0.2 percent. Britain's FTSE 100 fell 0.6 percent, Germany's DAX index dropped 1 percent, and France's CAC-40 fell 1.2 percent.