Stocks at 5-year highs as Fed launches more stimulus

Updated: 6:20 p.m. ET

Stocks soared today to nearly five-year highs after the Federal Reserve announced it will engage in a new round of economic stimulus because it fears the economy will stall without assistance.

The plan includes a promise that interest rates will remain at "exceptionally low levels" until mid-2015. Plus, the Fed said it will buy at least $40 billion a month in mortgage-backed securities to ensure that rates do, in fact, stay low. The bond-buying program is the Fed's third round of so-called quantitative easing, or QE.

The idea is that low interest rates, ultimately, will lead to more overall demand, especially for houses, job creation and a stronger economy. To get there may mean tolerating more inflation than the 2%-a-year rate the Fed says it regards as optimal.

Stocks were modestly higher ahead of the Fed decision, but the little rally morphed into a big one afterward. The rally was helped by Apple (AAPL), up $13.19 to $682.98 after hitting a new intraday high of $685.50 as Wall Street analysts fell over each other upgrading the stock after the company introduced its new iPhone on Wednesday.

The Dow Jones industrials ($INDU) closed up 207 points to 13,540; the blue chips were up as many as 240 points. The Standard & Poor's 500 Index ($INX) gained 23 points to 1,460. The Nasdaq Composite Index ($COMPX) added 42 points to 3,156.

Article continues below.The Nasdaq-100 Index ($NDX), heavily influenced by Apple, had gained 40 points to 2,831.

Gold (-GC) and crude oil (-CL) also surged to 7-month and 4-month highs, respectively, as the dollar fell against major currencies.

The Dow closed at its highest level since Dec. 26, 2007, and is within 625 points, or 4.4%, of its all-time closing high of 14,164.53, set on Oct. 9, 2007. The S&P 500's finish was its best since Dec. 31, 2007. The index is 6.7% below its October 2007 peak. The Nasdaq closed at its highest level since Nov. 15, 2000.

The Dow is up 1.8% this week and up 10.8% for the year. The S&P 500 is up 1.5% for the week and 16.1% for year. The Nasdaq's gain so far this week is 0.9%, but it's also up 21.5% for the year.

And for those who like history: The Dow is up 106.8% from its closing low on March 9, 2009. The S&P 500 is up 115.8% at the same time, and the Nasdaq is up 148.8%. The Nasdaq-100 is up 171.2%, reflecting a lot of Apple's big gains.

What the Fed did
The Fed's Federal Open Market Committee agreed to keep its federal funds rate -- what banks charge each other for overnight loans -- at 0% to 0.25%. The fed funds rate will probably hold through 2015. It said low rates would be in place through 2014. 

On top of that was the quantitative easing program, which will start with the Fed buying $40 billion in securities backed by Fannie Mae and Freddie Mac. But the program will be open-ended, meaning the Fed could continue to buy securities until the central bank believes the economy is strong enough to stop the program.

The Fed will also continue to reinvest proceeds from maturing securities it already owns. The combination of both programs will increase the Fed's holdings of longer-term securities by $85 billion a month.

How open-ended does the Fed plan to be? Try this from its statement: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

Bernanke wants stronger job growth
At a news conference this afternoon, Bernanke defended the Fed's decisions. He wants to see stronger job growth. "What we've seen in the last six months isn't it."

Between March and August, the economy added only 97,000 jobs a month. Between September and February, the monthly average was 205,000.

He asserted the Fed's policies were Main Street policies. "This is a Main Street policy because what we're about here are jobs," he said.

He dismissed the idea that the Fed was acting for political reasons. The Fed has worked to be "nonpartisan" and not take politics into account. "We make our decisions based entirely on the state of the economy."

Inflation isn't a problem, he insisted. If it does become an issue, the Fed will deal with it.

Energy prices -- New York close (updated)
			Thur.			Wed.			Month chg.			YTD chg.
Crude oil (-CL)			$98.31			$97.01			1.91%			-0.53%
(per barrel)
Heating oil (-HO)			$3.2113			$3.2152			0.98%			10.19%
(per gallon)
Natural gas (-NG)			$3.0370			$3.0630			8.50%			1.61%
(per mil. BTU)
Unleaded gasoline (-RB)			$2.9622			$3.0016			-0.36%			11.47%
(per gallon)
Brent crude			$116.90			$115.96			2.03%			8.87%
(per barrel)
Retail gasoline			$3.8690			$3.8430			1.04%			18.10%
(per gallon; AAA)

What the Fed decision means
The Fed's decisions mean this: If you can qualify for a 30-year mortgage, it will costs you 3.6% or so, and those rates will remain in place for some time. If you can qualify for a four-year auto loan, it will cost you 3.5%.

It also means that savers will earn very little on their money. To earn more will require accepting more risk, which may mean higher-yielding assets like corporate bonds, bond funds or stocks.

The decision was not unanimous. Jeffrey Lacker, president of the Richmond Federal Reserve Bank, opposed the decision. He opposed additional asset purchases and believes the Fed should not say when it expects low rates to end. Lacker has said before he thinks interest rates will move higher, perhaps as early as next year.

Critics charged the Fed is endangering the economy and could set off new inflation pressures. The dollar did move to a 7-month low against the Japanese yen and a 4-month low against the euro. The euro's close of about $1.30 today puts it within its range against the dollar since the end of 2004. The dollar has fallen against the yen.

A slow economy is the catalyst
The Fed moved today because the economic recovery has been tepid at best. The Fed itself trimmed its projection for 2012 growth to 1.7% to 2%; it was 1.9% to 2.4% in June. It sees the economy strengthening in 2013 and 2014, with the unemployment rate falling below 8% in 2013 and falling further in 2014.

You could see the weakness in today's jobless claims report.

The Labor Department estimated that 382,000 people filed for unemployment insurance last week, up from 367,000 the week before. The four-week moving average, which smooths out the trend, was 375,000, up for a fourth straight week.

One contributor to the increase was a rise in claims filed by workers affected by Hurricane Isaac.

Last week, the Labor Department said only 96,000 jobs were created in August, although the unemployment rate fell to 8.1%.

Metals, financial stocks lead the rally
Metals, financial and energy shares were the market leaders. All 30 Dow stocks were higher, along with more than 463 S&P 500 stocks and 91 Nasdaq-100 stocks.

Volume, however, was fairly light. New York Stock Exchange volume was 730 million shares.

Bank of America (BAC), JPMorgan Chase (JPM), American Express (AXP) and Alcoa (AA) were the top Dow stocks. Microsoft (MSFT) and Wal-Mart Stores (WMT) were the laggards. (Microsoft publishes MSN Money.)

Coal-producer Alpha Natural Resources (ANR),  Pall (PLL), real estate brokers CBRE Group (CBG) and iron-ore producer Cliffs Natural Resources (CLF) were the S&P 500 leaders. Auto-parts retailer O'Reilly Automotive (ORLY) and NRG Energy (NRG) were the laggards.

Monster Beverage (MNST) and Staples (SPLS) were the Nasdaq-100 leaders. Oreilly Automotive and chipmaker Marvell Technology (MRVL) were the laggards.

Will Apple hit $1,000?
Apple shares were up because of the iPhone excitement. The new device features a bigger screen and access to the fastest wireless networks.

The new model ships on Sept. 21 in the United States, Australia, Canada, France, Germany, Hong Kong, Japan, Singapore and Britain, and will hit 100 countries by the end of the year in the fastest international rollout for an iPhone so far.

Analysts raised forecasts for Apple's share price by as much as $200 to between $750 and $1,000.

While Apple hit a new high, Google (GOOG) m

Meanwhile, Northrop Grumman (NOC) fell 92 cents to $67.01, the fifth-biggest drop in the S&P 500. Revenue and margins at the maker of Global Hawk surveillance drones may decline more than other large defense companies as the U.S. makes budget cuts, according to UBS analyst David Strauss.

Nike (NKE) slid $1.64 to $99.20. Citigroup analyst Kate McShane cut her recommendation on the stock from "buy" to "neutral," citing valuation and the potential for deceleration of future orders because of a slowing global economy.

Pall rallied $4.63 to $62.80 after the supplier of filters for drugmakers and refineries said pro-forma earnings from continuing operations in the fourth quarter were 86 cents a share, exceeding the average analyst estimate of 77 cents.

Crude oil and gold move up; the dollar is lower
Crude oil jumped nearly to $99 early today as markets reacted to the violence in Libya that claimed the life of U.S. Ambassador Christopher Stevens and three other Americans. But the price fell back to settle at $98.31 a barrel, up $1.30. That was a

Brent crude was up 93 cents to $116.89 a barrel. Brent is the biggest influence on gasoline prices. The national average price of gasoline was up 2.6 cents to $3.869 a gallon, according to AAA's Daily Fuel Gauge Report.

Gold, meanwhile, settled up $38.40 to $1,772.10 an ounce, a seven-month high. Silver jumped $1.486 an ounce to $34.78.

The 10-year Treasury yield slipped to 1.756% from 1.765% on Wednesday. The dollar was weaker against major currencies.

Short hits from the markets -- New York close (updated)
			Thur.			Wed.			Month chg.			YTD chg.
Treasury yields
13-week Treasury bill			0.1000%			0.100%			11.11%			900.00%
5-year Treasury note			0.654%			0.696%			9.73%			-21.20%
10-year Treasury note			1.756%			1.765%			12.42%			-6.15%
30-year Treasury bond			2.967%			2.926%			10.54%			2.70%
Currencies
U.S. Dollar Index			79.237			79.723			-2.44%			-1.60%
British pound			1.6155			1.6116			1.68%			3.97%
(in U.S. $)
U.S. $ in pounds			£0.619			£0.621			-1.65%			-3.82%
Euro in dollars			$1.30			$1.29			3.09%			0.22%
(in U.S. $)
U.S. $ in euros			€ 0.770			€ 0.775			-3.00%			-0.22%
U.S. $ in yen			77.70			77.85			-1.01%			0.78%
U.S. $ in Chinese			6.35			6.32			-0.19%			0.41%
yuan
Canada dollar			$1.033			$1.025			1.81%			5.26%
(in U.S. $)
U.S. dollar			$0.969			$0.975			-1.78%			-5.00%
(in Canadian $)
Commodities
Gold (-GC)			$1,772.10			$1,733.70			5.01%			13.10%
(per troy ounce)
Copper (-HG)			$3.710			$3.693			7.32%			7.97%
(per pound)
Silver (-SI)			$34.7780			$33.2920			10.61%			24.59%
(per troy ounce)
Wheat (-ZW)			$9.0200			$8.9000			1.41%			38.18%
(per bushel)
Corn (-ZC)			$7.7375			$7.695			-3.25%			19.68%
(per bushel)
Cotton			$0.7353			0.7333			-4.83%			-19.80%
(per pound)
Coffee			$1.7885			1.775			8.56%			-22.12%
(per pound)
Crude oil (-CL)			$98.31			$97.01			1.91%			-0.53%
(per barrel)