NEW YORK -- Stocks got a shot of rocket fuel in the form of a new round of stimulus from the Federal Reserve, catapulting stocks to their highest levels in almost five years Thursday.
The S&P 500 stock index closed at its highest level since Dec. 31, 2007. The Nasdaq finished at its highest level since Nov. 15, 2000. And the blue-chip Dow Jones industrial average hit its highest closing level since Dec. 28, 2007.
The Dow, now at 13,540, climbed nearly 1.55% for the day; the S&P 500 shot up 1.6% and the Nasdaq rose 1.3%.
The Fed's latest salvo to ease monetary conditions is bullish for stocks going forward, says Michael Farr, president of money management firm Farr Miller &Washington.
The big risk for stocks, he says, would have been if the Fed didn't come to the rescue. But that didn't happen, and that greatly reduces the downside risk for stocks, Farr says. "The Fed action tells us that this recovery is very fragile and the Fed is putting the pedal down to the metal further," he adds.
Farr's outlook for stocks: "Smooth sailing for awhile. Don't worry about business fundamentals. Keep your eyes on the flow of cash from the Fed printing press. There is more coming."
Heading into the closely watched meeting, the consensus on Wall Street was that the Fed would launch a third round of bond buying, an unconventional policy known as "quantitative easing," or QE, in an effort to keep interest rates low and spark more business activity, boost confidence and bolster hiring by businesses.
The stock market had been moving higher as hopes rose for Fed action. Since Fed chairman Ben Bernanke's Aug. 31 speech in Jackson Hole, Wyo., when he laid out the case why QE3 still made sense given the weak jobs market, the Standard & Poor's 500 index has risen more than 2%. The benchmark index is up 6% since the Fed's June 20 meeting when Bernanke raised the prospect for another round of QE if the jobs market did not improve quickly. A weak August jobs report all but cemented the view on Wall Street that Bernanke would act at the September meeting rather than later.
Fed stimulus has had a huge impact on stock performance since the 2008 financial crisis. The S&P 500 stock index has risen an average of 0.68% on Fed meeting days since December 2008 when QE1 was announced, posting positive gains 20 out of 30 times, or nearly two-thirds of the time, according to Bespoke Investment Group.
What's more amazing is an investor who was in the stock market only on those 30 Fed days would have gotten a return of 22%. In contrast, the market returned 35.4% on the more than 900 non-Fed days."This means that nearly a third of the gains we've seen since December 2008 have come on only 3% of the trading days (or the Fed days), notes Bespoke's Paul Hickey in a note to clients.
On Thursday, the Fed delivered, announcing that it would purchase mortgage backed bonds at a rate of $40 billion per month.The Fed's aggressive moves pretty much send the message that it will continue to assist the economy. And that was met with relief by market participants, says Frank Fantozzi, president and CEO at Planned Financial Services in Cleveland, Ohio.
"The Fed met market expectations," says Fantozzi. "I think the market would have been disappointed if there was no announcement that the Fed was getting involved again," he says.
Given all the clues and hints of more accommodation the Fed has sent in recent weeks, it was not too surprising the Fed took action, he added.
"Obviously, the market had been impatient, given the slow economic recovery," says Fantozzi. "In regards to meeting the perception that the market needed help, this was the right thing to do. I don't think the market needed help. But investors were impatient and they were looking for help."
Since late 2008, the central bank has already embarked on two asset-purchase programs, dubbed QE1 and QE2, as well as another bond-buying strategy, referred to as Operation Twist. The stock market has responded with sharp gains each time,although the gains have gotten smaller with each Fed intervention.
Thursday, the Fed confirmed that it is going ahead with QE3. As expected, the central bank also said it would extend its pledge to keep short-term interest rates between 0%and 0.25% into mid-2015, from its prior guidance of late 2014.
Although the market's focus was mostly on the Fed, there were also jitters over events in the Middle East. Protesters stormed the U.S. Embassy compound in Yemen's capital Thursday and there is violence around the U.S. mission in Cairo.
The attacks come a day after the U.S. announced the death of its ambassador to Libya, where the American compound was overrun. The protests were sparked by an amateurish video produced in the U.S. called "Innocence of Muslims," which mocks Islam's Prophet Muhammad.
The attacks have pushed crude oil prices higher. Oil was trading above $97 per barrel on the New York Mercantile Exchange.
There were two economic reports out Thursday: The Labor Department reported that unemployment claims rose 15,000 to 382,000, pushed up by the impact of Tropical Storm Isaac. And a sharp rise in gasoline costs, due to the hurricane and refinery issues, drove up wholesale prices last month at a faster rate than has been seen in more than three years.
Removing energy and food costs, however, the increase in prices in August was mild.
The Labor Department reported that the producer price index, which measures price changes before they reach the consumer, jumped 1.7% in August. Excluding the volatile food and gas categories, core wholesale prices rose only 0.2%, below July's increase.