The Fed finally announced additional economic measures and benchmarks soared to touch new multi-year highs on Thursday. The announcement that the US Federal Reserve will buyback mortgage securities worth $40 billion every month until the labor market improves pushed the benchmarks instantly higher and the financial sector enjoyed robust gains. Investor confidence was bolstered following the news and led to above-average volumes.
The Dow Jones Industrial Average (DJI) soared 206.51 points or 1.6% to 13,539.86. The Standard & Poor 500 (S&P 500) jumped 1.6% to finish yesterday’s trading session at 1,459.99. The tech-laden Nasdaq Composite Index surged 1.3% to end significantly higher at 3,155.83. The fear-gauge CBOE Volatility Index (VIX) plunged 11.1% to settle at 14.05. The Street had its busiest day since June 22 as consolidated volumes on the New York Stock Exchange, Nasdaq and the American Stock Exchange amounted to roughly 8.14 billion shares, higher than 2011’s daily average of 7.84 billion shares. Advancers stormed past the declining stocks on the NYSE; as for four stocks that rose, only one stock edged lower.
The robust gains yesterday drove the benchmarks to fresh multi-year highs. The Dow and S&P 500 both soared to levels last witnessed in 2007, before the global recession battered the benchmarks. The Nasdaq posted an even better performance, closing at its highest level since November 2000.
The robust gains in the blue-chip index helped all 30 of its components close in the green. Apart from financial stocks, the gains were led by Alcoa, Inc. (NYSE:AA), Chevron Corporation (NYSE:CVX), The Home Depot, Inc. (NYSE:HD), The Coca-Cola Company (NYSE:KO), United Technologies Corp. (NYSE:UTX) and Exxon Mobil Corporation (NYSE:XOM) and they gained 3.0%, 1.8%, 2.2%, 2.1%, 2.2% and 1.9%, respectively.
The day was dominated by the announcement that the Fed would undertake a third round of quantitative easing (QE3). The central bank also announced that it will maintain the funds rate near zero at least till mid 2015. The announcement for QE3 came 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.
Fed Chairman Ben Bernanke said: “The employment situation ... remains a grave concern…While the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate." It was clear that the Fed is taking concerns about the labor market seriously The central bank said that it may "employ its other policy tools" if the "labor market does not improve substantially."
For past many trading sessions, volumes have been low as investors’ adopted a cautious stance and awaited action by the central bank. However, announcement of the QE3 drove the volumes beyond average. More importantly, the announcement brought cheer to investors who were awaiting the economic stimulus for months.
It is widely believed that additional economic measures have the potential to bolster the economic recovery. A market strategist noted that the plan would improve confidence about the economy, consumers will boost their spending and GDP will move up. The central bank stated that QE3 “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative”.
On a day when the additional economic measure was announced and was stated to continue till the jobs market improved, data suggested that initial claims had increased. The U.S. Department of Labor reported that initial claims jumped to a seasonally adjusted 382,000 in the week ending September 8, up 15,000 from prior week’s 367,000. This was also higher than consensus estimates of 368, 000.
While none of the 10 industry groups in the S&P closed in the red, the financial sector was one of the biggest gainers. The Financial Select Sector SPDR (ETF) jumped 2.7% and stocks including American Express Company (NYSE:AXP), Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C) and Morgan Stanley (NYSE:MS) surged 3.1%, 4.8%, 3.7%, 4.2% and 2.8%, respectively.