NEW YORK -- Wall Street was feeling more upbeat Thursday after a government report showed the economy contracted in the third quarter by less than expected and after the Federal Reserve's second interest rate cut in a month. The major stock indexes jumped more than 2%, including the Dow Jones industrials, which rose more than 180 points.
The Commerce Department reported that the nation's economic output was the weakest since the third quarter of 2001, but it wasn't as bad a showing as Wall Street had feared. The department said the gross domestic product, the measure of all goods and services produced within the U.S., fell at a 0.3% annual rate in the July-September quarter, rather than 0.5% as expected.
In trading Thursday, the Dow rose 189.73, or 2.11%, 9,180.69. In the broader market, the Standard & Poor's 500 index rose 24.00, or 2.58%, to 954.09, and the Nasdaq composite rose 41.31, or 2.49%, to 1,698.52.
Investors' cautious optimism and generally calm trading followed a mixed finish Wednesday after the Fed's decision to lower its fed funds rate by a half-point to 1%. Many investors had hoped the market would build on an 889-point surge in the Dow Jones industrial average on Tuesday. But some of the buying momentum reappeared Thursday after the GDP report and the Fed's second interest rate cut since Oct. 8.
Michael Strauss, chief economist at Commonfund, said Wall Street was relieved that the GDP figures weren't worse and that, more broadly, investors are drawing some confidence from the government's array of efforts to revive the credit markets as boding well for a weak economy.
"I think it's sort of 'What do you have to do to get someone back from cardiac arrest?' You have to shock them pretty hard and sometimes you have to shock them a couple of times. I think that's what going on here," he said, referring to steps like the Fed's rate cuts and government cash injections in banks, which began this week.
Strauss contends the programs, most of which have yet to take effect, are creating some appetite for snapping up stocks that have been pounded down this month.
"I think we're seeing that transition from 'don't buy' to 'maybe we buy something,'" he said.
Investors will want to see the gains hold, particularly during the last hour of trading, which has produced many of the market's recent surges and sell-offs. The overall back-and-forth moves on Wall Street have been enormous for more than a month as hedge funds and mutual funds and other professional traders shore up their positions or respond to sell orders.
On Wednesday, the Dow rose as much as 298 points in the final minutes of the session before ending down 74.16 points, or 0.82%. Analysts variously blamed reports — later disputed — about a profit forecast at General Electric ge and investors' profit taking. The S&P 500 index fell 1.11%, while the Nasdaq composite index rose 0.47%.
Investors appeared more hopeful Thursday that the Fed's rate cut will help stimulate a weak economy and add to the government's other measures to shore up the banking sector and restore confidence among lenders and investors.
Chris Hensen, senior portfolio manager at MFC Global Investment Management in Toronto, said the GDP numbers raised the possibility that Wall Street has been too dour in its assessment of the economy. But even if the numbers are shown to be weaker in subsequent revisions — as some observers speculated — he said the early read on third-quarter GDP served as a reminder that even in a weak economy companies can remain profitable.
He pointed to CVS Caremark, which on Thursday reported that its third-quarter earnings rose 7% as its retail pharmacy revenue improved.
"There's some slight incremental surprises out there," Hensen said. "You get numbers out that aren't as draconian."
But investors were still drawn to government debt as some jitters remained. The yield on the three-month Treasury bill, regarded as the safest investment around and an indicator of investor sentiment, fell to 0.44% from 0.55% Wednesday. A drop in yield indicates an increase in demand. Meanwhile, the yield on the benchmark 10-year Treasury note rose to 3.92% from 3.86% late Wednesday.
Wall Street remains worried about how much the economy will slow and whether the stock market's pullback adequately accounts for the decrease in corporate profits likely to come. With its advance this week, the market appears more enthusiastic about the likelihood that the economy will sidestep a protracted recession. Though definitions vary, economists often point to back-to-back quarterly declines in GDP. Thursday's GDP report signals the economy half way to that point.
Regardless of whether the economy is in a recession, consumers and investors are feeling the pinch. As the end of October nears, the Dow is down 17.1%, having fallen in 16 of the month's 21 trading days.
On Thursday, the dollar was lower against other major currencies, while gold prices fell.
Light, sweet crude fell $1.54 to $65.96 per barrel on the New York Mercantile Exchange.
Asian stock markets bounced up by double-digit percentages on hopes that lower interest rates will give a push to ailing economies, but a rally in European shares was restrained by Wall Street
Britain's FTSE 100 rose 1.16%, Germany's DAX index rose 1.26%, and France's CAC-40 rose 0.15%.
After the Federal Reserve cut U.S. interest rates Wednesday, Tokyo's benchmark Nikkei 225 shot up nearly 10%, or 818 points, to 9029.76. The Nikkei has now risen 26% the past three sessions after hitting a 26-year low last week. In Hong Kong, the Hang Seng index surged nearly 13%. In Seoul, the South Korean benchmark Kospi index enjoyed a record day, jumping nearly 12%.
Japanese investors cheered when their currency, the yen, weakened against the U.S. dollar and the euro, improving the competitive edge of export companies such as Toyota and Canon, both of which saw their shares rise more than 11% Thursday.
"The Japanese economy very much relies on exports. That's the biggest factor" in the Nikkei rally, said Ikuo Yasuda, chairman and CEO of the financial advisory firm Pinnacle Inc. in Tokyo.
Investors also are expecting the Bank of Japan to cut interest rates when it meets Friday, reacting to increasing evidence that the Japanese economy sank into recession during the third quarter, Moody's Economy.com reported.
In Seoul, the Kospi got a boost from news that the Bank of Korea and the Fed had reached an agreement to help stabilize the South Korean currency, the won; and that the deficit in the country's current account – the broadest measure of trade — had narrowed to $1.2 billion in September from $4.7 billion in August. Moody's said the improved trade numbers would "ease fears of any impending crisis." The won had been hammered by a widening trade deficit caused in part by surging oil prices.
Pinnacle's Yasuda warns that a couple of good sessions don't mean stock markets have started a long- or medium-term rally after crumbling in the wake of Wall Street's financial meltdown: The up days are just part of a roller-coaster ride as investors try to figure out where things are headed. "The stock prices change 5%, 10% every day," he said. "The volatility is too much."