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Benchmarks rose to new multi-year highs on Friday after the Federal Reserve announced big plans to boost the economy. The gains came despite investor concerns about the extent to which the Fed can fix the economy and combat the high unemployment rate. Several economic reports released on Friday also helped to justify the Fed's decision to initiate a bond buying program. The Dow and the S&P 500 were at their best levels since December 2007, and the Nasdaq soared to its highest level since November 2000.
The Dow Jones Industrial Average (DJI) gained 53.51 points or 0.4% to end at 13,593.37. The Standard & Poor 500 (S&P 500) surged 0.4% to finish Friday’s trading session at 1,465.77. The tech-laden Nasdaq Composite Index surged almost 0.9% to close at 3,183.95. The fear-gauge CBOE Volatility Index (VIX) surged 3.27% to settle at 14.51. Total volumes on the New York Stock Exchange, Nasdaq and the American Stock Exchange amounted to roughly 8.45 billion shares, higher than last year’s daily average of 7.84 billion shares. Advancers outpaced the declining stocks on the NYSE; as for 66% stocks that gained, only 30% stocks closed lower.
Following the robust gains on Thursday, benchmarks enjoyed yet another good session as the announcement of the third round of quantitative easing (QE3) policy continued to boost the markets. The announcement about QE3 comes after months of anticipation. Moreover, the central bank did not restrict the purchase of mortgage debt within a specific time frame. The Fed announced that it will buy back mortgage-backed securities worth $40 billion every month till labor conditions improve.
For the past several trading sessions, volumes had been low as investors had adopted a cautious stance awaiting action by the central bank. However, the announcement of QE3 drove volumes beyond the yearly average for the second consecutive day. More importantly, the announcement brought cheer to investors who were awaiting the economic stimulus for months.
The economic reports released on Friday were Industrial Production, Business Inventories, Retail Sales and Consumer Price Index (CPI). The U.S. Department of Commerce reported data on business inventories and noted a 0.8% rise in manufacturers’ and trade inventories to an estimated end-of-month level of $1,592.0 billion in July, the largest gain in six months.
The Board of Governors of the Federal Reserve System reported that industrial production dropped 1.2% in August, the highest since March 2009, following a rise of 0.5% in July. As output was restrained in the Gulf Coast region during the late August due to Hurricane Isaac, total industrial production fell by 0.3%.
The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) had gained 0.6% in August, after remaining flat last month. Excluding food and energy, the index edged up 0.2% in August. Separately, retail sales increased 0.9% in August. This was the best jump in the last six months. High automobile demand and a rise in gasoline prices ultimately meant consumers could spend little on other goods.
Meanwhile, the health insurer UnitedHealth Group Inc. (NYSE:UNH) replaced food and snacks company Kraft Foods Inc (NASDAQ:KFT) on the Dow Jones index, because Kraft will become a smaller company after it divests its North American grocery business. This change will take effect from September 24th.
Among the sectors, housing was a major gainer and the SPDR S&P Homebuilders (XHB) soared 2.1%. Among the stocks, KB Home (NYSE:KBH), The Ryland Group, Inc. (NYSE:RYL), Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), PulteGroup, Inc. (NYSE:PHM) and NVR, Inc. (NYSE:NVR) jumped 5.7%, 5.7%, 3.8%, 3.3%, 3.1% and 0.9% respectively.