Stocks jump as investors await Fed announcement; bounce follows biggest drop in 5 weeks

Stocks jump ahead of Fed decision

NEW YORK — Investors seized on a buying opportunity Wednesday, picking up bargain stocks after a big pullback.

Stocks jumped in light trading Wednesday as investors awaited the Federal Reserve’s interest rate announcement. Major stock market indicators rose more than 1 percent, including the Dow Jones industrial average, which gained 125 points to reverse a sharp slide Tuesday.

For months, investors have been looking for evidence that the economy is strengthening and pulling out of recession. Traders pay particular attention to the Fed’s assessments of the economy. The latest is due at 2:15 Eastern when the central bank concludes a two-day meeting on interest rates.

It is widely expected that the central bank will hold the federal funds rate near zero. What investors are uncertain about it how the Fed will size up the economy — whether it sees further signs of strengthening that would justify the gains in stocks since the spring.

Chuck Widger, CEO of investment management firm Brinker Capital Inc. in Berwyn, Pa., said investors are looking for the Fed to signal it will maintain supports for the economy like the purchase of mortgage debt to hold down interest rates.

“The market quiet clearly is anticipating steady as you go,” he said. “We’ve made significant progress in healing both the financial system and the economy but there is still very important work to do. The Fed is going to stay on the job.”

The market’s jump wasn’t typical for the hours before a Fed announcement. Traders tend to remain cautious and make only small moves.

Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Ill., said improved quarterly results from luxury homebuilder Toll Brothers and retailer Macy’s Inc. could be signaling that consumption is increasing. That is key to a recovery in the economy because consumer spending accounts for more than two-thirds of U.S. economic activity.

In midafternoon trading, the Dow rose 125.83, or 1.4 percent, to 9,367.28. The Standard & Poor’s 500 index rose 12.81, or 1.3 percent, to 1,007.16, while the Nasdaq composite index gained 32.46, or 1.7 percent, to 2,002.19.

About four stocks rose for every one that fell on the New York Stock Exchange, where volume came to 613.4 million shares, compared with 686.1 million shares traded Tuesday. Light volume price moves and could be overstating investors’ enthusiasm ahead of the Fed decision.

The market is bouncing back a day after posting its biggest loss in five weeks. The Dow slid 1 percent and the S&P 500 index lost 1.3 percent.

Homebuilders jumped after Toll Brothers said 3 percent more homebuyers signed contracts in its fiscal third quarter, the first annual increase in four years. Demand has been strong enough that the company has been able to reduce incentives it has offered to bring in buyers.

Toll’s statement that many of its markets are improving boosted confidence about the prospects for a recovery in the overall economy because along with unemployment housing is one of the biggest obstacles to a rebound.

Toll jumped $2.94, or 14.4 percent, to $23.42. Hovnanian Enterprises Inc. rose 22 cents, or 5.6 percent, to $4.14.

Macy’s reported a better-than-expected second-quarter profit and cited cost-cuts in raising its full-year earnings forecast. Macy’s rose 78 cents, or 5 percent, to $16.25.

In economic news, the nation’s trade deficit edged up less than expected in June. The Commerce Department said the deficit increased to $27 billion from $26 billion in May, which was the lowest level since November 1999. Economists polled by Thomson Reuters had expected the deficit to increase to $28.5 billion.

Meanwhile, bond prices fell after an auction of $23 billion in 10-year Treasury notes saw demand in line with recent levels but down from last month. The Treasury Department is auctioning a record $75 billion in debt this week.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.73 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday. Bond prices jumped Tuesday as stocks fell.

Investors will track demand because a drop in buyers could force the government to increase its payout. The results rise in rates would raise borrowing costs for consumers and could slow a recovery in the economy.

Larry Rosenthal, president at Financial Planning Services in Manassas, Va., said investors are eager to see what the Fed might say about inflation. Fears about rising prices due to an increase in government debt could force policymakers to boost rates.

The dollar was mixed against other major currencies, while gold rose.

Benchmark crude rose $1.22 to $70.67 a barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies rose 12.26, or 2.2 percent, to 574.38.

Overseas, Britain’s FTSE 100 rose 1 percent, Germany’s DAX index added 1.2 percent, and France’s CAC-40 jumped 1.5 percent. Japan’s Nikkei stock average fell 1.4 percent.