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Stock Market Roars Back

(NECN: Peter Howe) - Whether it was the market correcting an overreaction Monday or investors taking a favorable view of some Federal Reserve news, Tuesday turned out to be a surprisingly good day in U.S. stock markets. On the strength of a last-hour bull roar, the Dow Jones Industrial Average closed up 429.92 points, or 4 percent, to 11,239.77.

To some extent, it appeared to be bargain hunters and value seekers responding to Monday’s wipeout after the Standard & Poor’s downgrade of America’s AAA credit rating. Shares of Bank of America, for example, which had been pummeled 20 percent down on Monday, came back 17 percent on the day to make up much of their losses.

 “People are looking at the market I think a little bit differently today, maybe in an oversold mode, and that we might have found a bottom,” said Doreen Mogavero, founder and CEO of trading firm Mogavero, Lee.

The single biggest piece of news Tuesday for U.S. investors was a statement from the Federal Reserve Open Market Committee, saying that “the committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.’’

Translated, that means for the first time the Fed is attaching a specific date to its promise it will keep interest rates “for an extended period” at their near-zero levels.

Some investors had been hoping the Fed would promise a third round of “quantitative easing,” or monetary stimulus, an extension of the policy through which the Fed has effectively printed $2.3 trillion in cash to buy up bonds and force-feed the economy with cheap money in hopes of stimulating spending, lending, borrowing, and investing. The last round of $600 billion in quantitative easing ended in June.

The Fed only appeared to leave the door slightly open to the possibility of more of the same. It said it would reinvest proceeds from bonds that mature into buying more bonds, and said it “will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.” That fell far short of the full-throated commitment to more easing some investors had hoped for.

Notably, while many American investors and officials feel at wit’s end trying to figure out what more to do to get the economy growing and the unemployment rate declining, it appears that conflict extends all the way to the highest reaches of the Fed. The vote on the interest-rate policy statement was 7 for, 3 against – the most dissenting votes against a Fed Open Market Committee statement since late 1992. Three dissenters said they wanted to stick with the “extended period” language rather than promise a minimum time period for near-zero interest levels.

While Tuesday reversed some of the sting of Monday, stock investors have still lost 15 percent of their wealth in the last month and given back all of the gains the market had recorded since late December. Besides an apparently slowing economy, the perceived growing risk of a double-dip recession in the U.S. or globally, looming battles in Washington over U.S. deficits and debts, investors also continue to worry about whether European Union nations will have to spend hundreds of billions of dollars bailing out countries struggling with huge deficits and slow growth.

 “In general, we have a lot of problems -- not to mention in Europe. Europe is number one on our radar screen, much more than this S&P downgrade, because if Italy or Spain do default, that is a problem because they're probably too big to fail," said trader Alan Valdes of DME Securities.

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