On Wednesday, the Dow recorded its largest rally since March 2009 after coordinated action by the central banks to ease the cost of borrowing in dollars helped the markets gain over 4%. Encouraging domestic economic data also chipped in to add to the gains and the fear-gauge index slipped well below the technical level of 30.
On a day when the benchmarks looked determined to soar higher, the Dow Jones Industrial Average (DJIA) recorded its seventh-largest rally ever, gaining 490 points or 4.2% to finish the day at 12,045.68. The Standard & Poor 500 (S&P 500) increased by 4.3% to soar to 1,246.96 by the end of the trading session. The Nasdaq Composite Index leapt 4.2% and closed the day at 2,620.34. The fear-gauge CBOE Volatility Index (VIX) is back below the key level of 30 and it settled below 28 yesterday. The Street had a busy day after a few sessions with low volumes and consolidated volumes on the New York Stock Exchange, Amex and Nasdaq were 10 billion shares, substantively higher than the daily average of 7.96 billion shares. On the NYSE, for seven stocks that advanced, just one stock traded lower.
The day's gains pushed the Dow back into the positive territory for the year and it is up 4% year to date. However, the gains were not enough to wipe away the losses the benchmarks had suffered this month and while the Dow ended up 0.6% for the month, the S&P 500 and Nasdaq were down 0.5% and 2.3%, respectively. Coming back to the year-to-date performance, the S&P 500 and Nasdaq are down 0.9% and 1.2%, respectively.
If the Dow surged by about 500 points, it is almost certain that all of its 30 components would enjoy a green finish. Stocks that led the race were Alcoa, Inc. (NYSE: AA ), Bank of America Corporation (NYSE: BAC ), Caterpillar Inc. (NYSE: CAT ), Chevron Corporation (NYSE: CVX ), General Electric Company (NYSE: GE ), JPMorgan Chase & Co. (NYSE: JPM ), Walt Disney Co. (NYSE: DIS ) and Cisco Systems, Inc. (NASDAQ: CSCO ) and they jumped 7.6%, 7.3%, 8.1%, 5.6%, 6.6%, 8.4%, 5.4% and 5.4%, respectively.
Coordinated action by the world's central banks to reduce the cost of dollar funding though swap arrangements was the major reason behind the market's gains. The European Central Bank, the Central Bank of Canada, and also those of the U.K., Japan and Switzerland provided much needed relief to global markets. The banks stated that the step was taken in order to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity".
Separately, for the first time ever since 2008, China lowered cash reserve requirements for its banks. The People's Bank of China (PBOC) lowered the bank reserve requirements by 50 basis points. The move reflects an easier monetary policy, contrary to the Chinese central bank's policy of monetary tightening.
A host of encouraging domestic economic data also added to the momentum. An increase in hiring, higher home sales and the Fed's Beige Book's suggestion of a moderate pace of economic expansion boosted investor sentiment. According to data by Automatic Data Processing, Inc. (NASDAQ: ADP ) the private sector added a seasonally adjusted 206,000 jobs in November, the largest increase in hiring since December 2010. The gains were boosted by the service-producing sector and small businesses.
Separately, the National Association of Realtors (NAR) reported a strong increase in pending home sales in October as the Pending Home Sales Index jumped 10.4% to 93.3 in October from 84.5 in September. According to NAR chief economist, Lawrence Yun: "Many consumers are recognizing that home buyers in the past two years have had one of the lowest default rates in history. Moreover, continued inventory declines are another healthy sign for the housing market".
Separately, the Fed's Beige Book stated: "Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity". Additionally, The Chicago Purchasing Managers Index, a regional indicator of the economic health of the manufacturing sector in Illinois, Indiana and Michigan, reported a rise in manufacturing activity to 62.6, which topped consensus estimates of 58.4.
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