Bernanke’s Views Spur Stocks, Hit Bond Yields

The bulls kept running Wednesday on Wall Street, pushing the Dow Jones industrial average to its second record high in as many days in a broad market rally.

The Dow’s 123.27-point advance was driven in part by comments from Federal Reserve Chairman Ben S. Bernanke, who said the housing market was in a “substantial correction” that would hinder economic expansion.

Some investors took Bernanke’s remarks as a hint that the Fed would keep its benchmark interest rate at 5.25% for the remainder of the year and might even begin nipping it back in 2007.

That fueled a rally in the bond market that brought yields on two-year Treasury notes to their lowest levels since February.

“When bond yields go down, investors often pile into stocks. That’s what happened today,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco.

Tuesday’s record run -- in which the Dow finally topped the high it had set Jan. 14, 2000 -- may have also contributed, with the advance luring more investors back into blue-chip stocks.

Many mutual fund managers who had been waiting for a dip to invest their cash jumped into the market, figuring that they might have missed the chance to take advantage of lower prices, said David Brady, president of Brady Investment Counsel in Chicago.

“They took their cash off the table and rotated into large-company growth stocks,” he said.

In heavy trading, the Dow added 1.1% to close at 11,850.61. The Standard & Poor’s 500 index jumped 16.11, or 1.2%, to 1,350.22. Smaller stocks have lagged behind blue chips in recent months, but the Dow’s record Tuesday seemed to stoke interest across the board.

The Nasdaq composite surged 47.30 points, or 2.1%, to 2,290.95 for its biggest gain since Aug. 15. The Russell 2,000 small-stock index also soared 2.1%, its best move since Sept. 12.

Winners topped losers by more than 3 to 1 on the New York Stock Exchange and more than 2 to 1 on Nasdaq.

Stocks have gained steam in recent weeks as interest rates and oil prices have fallen -- factors that should bolster consumer spending.

On Wednesday, crude oil futures jumped 73 cents to $59.41 a barrel in New York trading but did little to damp spirits on Wall Street. Oil’s advance was linked to what were likely to be blips on the screen -- violence in Nigeria and the temporary shutdown of a Houston oil refinery -- and was not seen as the beginning of another protracted run-up in energy costs.

Early in the day, remarks made by Bernanke after a speech in Washington renewed Wall Street’s confidence that the central bank would keep interest rates steady for the rest of the year and might start cutting them early in 2007.

Yields on two-year Treasury notes sank to 4.59% from 4.66% on Tuesday. That’s the lowest yield since February.

The 10-year T-note, a benchmark for mortgages, ended at 4.56%, down from 4.61% on Tuesday. The yield hit a seven-month low of 4.54% on Sept. 25.

Another sign that inflationary worries have eased: Investors continued to bail out of gold, another recently hot commodity. Near-term futures in New York plunged $14.30 to $562 an ounce, the lowest level since March. The metal’s price peaked at $720 an ounce in May.

For stocks, “the fundamentals that have driven the market up are good,” said Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y.

As he began an interview, Johnson was humming “Happy Days Are Here Again.”

Still, investment experts said there might be obstacles to further gains. Wednesday’s rally was predicated on faith that the economy would continue to churn along at a “Goldilocks” temperature -- not too hot, not too cold.

If the economy expands faster than anticipated, it could spur inflation; if growth is sluggish, the nation could fall into a recession. Either could derail stock prices, said Tom Higgins, chief economist for Payden & Rygel in Los Angeles.

“The stock market sees strong corporate profits and what they think will be a soft landing,” Higgins said. “I’m not sure that I buy into that.

“The bond market thinks we’re going to see some sort of recession. The stock market thinks we’re going to have growth,” he said. “They can’t both be right. I think stocks are due for some type of correction.”

Among Wednesday’s market highlights:

* Mortgage lenders surged on prospects of lower interest rates. Countrywide Financial of Calabasas, the nation’s largest mortgage lender, rocketed $1.53 to $36.48. IndyMac Bancorp of Pasadena rose $1.82 to $42.70 and Accredited Home Lenders of San Diego grew $1.31 to $35.99.

* Home builders also posted gains on prospects that lower mortgage rates could kick-start flagging sales. Lennar advanced $1.05 to $45.92, Pulte Homes picked up 63 cents to $32.31 and KB Home of Los Angeles added 64 cents to $44.01.

* A pickup in home sales could also help retailers such as Home Depot, which gained 66 cents to $37.49, and Lowe’s, which was up $1.33 to $29.96. Wal-Mart Stores added 9 cents, to $49.55, despite lowering its estimate of same-store sales growth in September.

* TiVo fell 85 cents to $6.67 on a setback in its patent fight with EchoStar Communications, which gained 6 cents to $32.13.

* Wall Street helped fuel a surge in Latin American markets. Mexican stocks jumped 2.2% to a record high and Brazil’s main index shot up 3.6%.

[email protected]