NEW YORK – Stocks rose Tuesday as oil prices retreated from record highs and as the Federal Reserve decided to raise rates by a quarter point, in line with Wall Street expectations, and said underlying inflation remained contained.
The Dow Jones industrial average (search) gained 78.74 points, or 0.75 percent, to end at 10,615.67. The Standard & Poor's 500 index (search) added 8.25 points, or 0.67 percent, to finish at 1,231.38. The technology-laced Nasdaq Composite Index (search) rose 9.80 points, or 0.45 percent, to 2,174.19.
The central bank's policy-making Federal Open Market Committee raised interest rates by 25 basis points for the 10th straight time since June 2004, lifting the benchmark for short-term rates by a quarter percentage point to 3.5 percent.
The FOMC also held to its long-standing pledge to raise interest rates at a "measured" pace to combat the threat of inflation, which suggested that rates may not be increased by more than a quarter percentage point in the foreseeable future.
"It is a confirmation that the overall economy remains quite robust and ... inflationary pressures ... are not enough to escalate rate hikes more than what they are doing right now," said Sam Rahman, head of U.S. equities at Baring Asset Management.
Shares of companies sensitive to borrowing costs such as Pulte Homes Inc. (PHI) climbed as the yield on the benchmark 10-year U.S. Treasury note slipped. The 10-year note's yield is used in setting mortgage rates, and lower rates serve as a catalyst for new home purchases.
Wall Street was also soothed as crude oil futures fell to $63.07 a barrel, down 87 cents, on the New York Mercantile Exchange (search). Oil hit a record intraday high of $64.27 Monday following the announcement the U.S. embassy in Saudi Arabia would close for two days due to threats.
Home builders' shares, which are especially sensitive to rising rates, gained after the Fed's rate decision. Pulte Homes Inc. jumped 1 percent, or 89 cents, to $87.64, while KB Home also advanced 1 percent, or 74 cents, to $73. The Dow Jones index of home construction companies rose 1.1 percent a day after it closed at its lowest level since June.
But earnings that were reported after Tuesday's closing bell failed to generate excitement.
Cisco Systems Inc. inched down to $19.60 on the Inet electronic brokerage system from its Nasdaq close of $19.61 after the No.1 maker of equipment for Internet traffic reported quarterly results, which were largely in line with Wall Street forecasts.
"Looks like Cisco met expectations, which is good, but you need it to exceed expectations to drive the stock and the market the next day," said Richard Sichel, chief investment officer at Philadelphia Trust Co., who does not own Cisco shares. "The market itself is somewhat fickle and after the Fed's announcement today and Cisco's results, which were just fine, it will be looking for something more exciting."
Shares of Walt Disney Co. fell to $25.96 from their New York Stock Exchange close of $26.14 after it posted quarterly revenue that was below analysts' expectations.
Investors were also cheered by Labor Department (search) data showing work force productivity rose at a 2.2 percent rate in the second quarter, down from a 3.2 percent rate in the first quarter. The rise in labor costs also slowed in the second quarter to an annual rate of increase of 1.3 percent, far below the gains of the past nine months and a sign that inflation pressures remained in check.
Wall Street feared that continued wage increases could spark inflation and give the Federal Reserve reason to keep raising the short-term federal funds interest rate.
Bonds rose, with the yield on the 10-year Treasury note falling to 4.41 percent from 4.42 percent late Monday, the highest yield since April. The U.S. dollar was down against the euro in European trading. Gold prices were down.
In company news, May Department Stores Co. (MAY) said its second-quarter profit fell by nearly half from the year before, hurt by expenses from its planned merger with rival Federated Department Stores Inc., the owner of Macy's and Bloomingdale's. The retailer's profits missed analysts' estimates by a wide margin. Its stock fell 13 cents to $40.07.
Blockbuster Inc. (BBI) fell 92 cents to $7.09 after the nation's biggest movie-rental chain reported a second-quarter loss due to a revenue decline after it eliminated late fees. Adjusting for one-time items, the company missed analysts' estimates by 10 cents a share.
Shares of Time Warner Inc. (TWX) rose 57 cents to $18.54 following a CNBC report that financier Carl Icahn is attempting to organize an investor group, potentially to advocate for the break up of the media conglomerate. Icahn has contacted hedge funds, institutions, and former Time Warner executive Ted Turner to gauge their interest in joining such a group, according to the report.
Shares of Delta Air Lines Inc. (DAL) slid 28 cents to $1.95 after Merrill Lynch downgraded its stock to "sell", saying the latest jump in oil prices increases the chance the troubled airline will file for bankruptcy within two months.
Top gainers included Irish drug maker Elan Corp. (ELN), up 13.6 percent, or $1.09, at $9.09 on the NYSE, and its U.S. partner, Biogen Idec (BIIB), up 7.3 percent, or $2.82, at $41.24 on the Nasdaq. Elan said a safety study for its multiple sclerosis drug Tysabri has found no new confirmed cases of the brain disease that prompted the Irish company to withdraw the drug. .
Shares in auto-parts maker Delphi Corp. (DPH) rose 9.2 percent, or 46 cents, to $5.49 after Goldman Sachs & Co. raised its rating to "in-line" from "underperform," citing the likelihood that it can avoid a bankruptcy filing.
Procter & Gamble Co. (PG) was one of the few decliners in the Dow Jones 30 industrials, with its shares sliding 0.3 percent to $54.13. The company said earlier this month it expects foreign exchange fluctuations to reduce sales by 1 or 2 percent for 2006.
On the NYSE, about 1.46 billion shares changed hands, matching last year's daily average of 1.46 billion, and on Nasdaq, 1.50 billion shares traded, below last year's daily average of 1.81 billion.
Advancers outpaced decliners by a ratio of 10 to 7 on the New York Stock Exchange and about 8 to 7 on the Nasdaq.
The Russell 2000 index of smaller companies rose 0.88, or 0.13 percent, to 660.48.
Overseas, Japan's Nikkei stock average rose 1.03 percent. In afternoon trading, Britain's FTSE 100 was up 0.36 percent, Germany's DAX index was up 1.48 percent, and France's CAC-40 was up 1.14 percent.
Reuters and the Associated Press contributed to this report.