NEW YORK (AP) -- Stocks rallied Tuesday as investors, relieved by better-than-expected results from Lehman Brothers and Goldman Sachs, also anticipated a massive interest rate cut from the Federal Reserve. The Dow Jones industrial average surged more than 200 points.
A rate cut from the Fed in the afternoon would come just two days after the central bank backed JPMorgan's buy of Bear Stearns Cos., and relaxed its own lending practices.
Though the stock market wants more details about the souring mortgage-related bets on investment banks' books, its tone Tuesday was significantly more upbeat than it has been in recent days.
Two rivals of Bear Stearns -- Lehman Brothers Inc. and Goldman Sachs Group Inc. -- both posted quarterly profits that were significantly lower than they were a year ago, but higher than analysts had anticipated.
Investors had sent stocks plunging late last week and Monday morning, after JPMorgan Chase & Co. said Sunday it was buying Bear Stearns for just $2 a share, or $236 million (euro149.65 million). Lehman Brothers, being the investment bank most similar in structure and exposure to Bear Stearns, was particularly hard hit Monday.
But early Tuesday, Lehman shares spiked back up 16.7 percent, by $5.31 to $37.06, while Goldman shares rose 8.2 percent, by $12.36 to $163.38.
In the first hour of trading, the Dow rose 202.23, or 1.69 percent, to 12,174.48.
Broader stock indicators also surged. The Standard & Poor's 500 index rose 26.19, or 2.05 percent, to 1,302.79, while the Nasdaq composite index rose 43.43, or 1.99 percent, to 2,220.44.
The Fed on Sunday, in addition to guaranteeing up to $30 billion (euro19.02 billion) of Bear Stearn's most troubled assets for JPMorgan, lowered its discount rate -- the rate it charges banks directly -- by a quarter-point. It also is allowing more types of financial firms to borrow from the central bank, and is accepting more various types of collateral.
After these signals that the Fed is ready to use everything in its arsenal to boost liquidity in the financial system, traders who bet on the Fed's next rate move are pricing in a 100 percent chance of a full-point rate cut. That would bring the target fed funds rate -- the rate that banks charge each other for overnight loans -- to 2 percent from 3 percent.
Lower rates tend to trigger economic growth. But with the credit markets so tight with nervousness, many market watchers are unsure whether more rate cuts are going to be enough to loosen them up again.
Bond prices fell as investors returned to stocks. The yield on the benchmark 10-year Treasury note, which move opposite its price, rose to 3.39 percent from 3.30 percent late Friday.
The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude rose $1.87 to $107.55 per barrel on the New York Mercantile Exchange.
On Monday, the Dow rebounded from an initial drop of nearly 200 points to finish up 21 points. The S&P 500 and Nasdaq indexes ended lower as investors fled to larger, established companies.
The strongest stock among the Dow components on Monday was JPMorgan, which rose another $1.47, or 3.7 percent, to $41.78 Tuesday. As of Monday's close, JPMorgan's buyout valued Bear Stearns at $2.21 a share, or $260.5 million (euro165.19 million).
Wall Street was not concentrating on economic data with the Fed's rate decision on tap, but Tuesday's reports supported the notion that the U.s. economy is continuing to slide while costs are rising.
The Commerce Department said home construction fell in February: housing starts fell 0.6 percent, while building permits plummeted 7.8 percent.
Meanwhile, the Labor Department reported a 0.3 percent rise in its Producer Price Index for February, in line with estimates, but the core PPI, which strips out food and energy prices, rose by a greater-than-expected 0.5 percent.