NEW YORK – Stocks rose sharply Tuesday as oil prices slipped and as speculation grew that the economic impact from Hurricane Katrina (search) may prompt a pause in the Federal Reserve's interest-rate hike policy.
The Dow Jones industrial average (search) was up 141.87 points, or 1.36 percent, at 10,589.24. The Standard & Poor's 500 Index (search) was up 15.37 points, or 1.26 percent, at 1,233.39. The technology-laced Nasdaq Composite Index (search) was up 25.79 points, or 1.20 percent, at 2,166.86.
The Dow and the Nasdaq logged their best gains in about two months, while the S&P saw its biggest rise since April. The NYSE Composite Index rose to 7,619.80, an all-time high.
"Today was a relief rally; it was an oil price relief story," said Lynn Reaser, chief economist of the investment strategies group at Bank of America. "Oil prices are still very high, but much more moderate than the worst fears of last week."
U.S. crude oil futures settled $1.61 lower at $65.96 a barrel on the New York Mercantile Exchange (search) as oil production and refinery operations were slowly recovering from last week's deadly storm. Oil hit a high of $70.85 on Wednesday. NYMEX October gasoline settled down 12.87 cents, or 5.9 percent, at $2.055 a gallon.
"Airlines and industrials are gaining from lower oil. Discounters are responding not only to a drop in oil prices but also to Wal-Mart's statement that it will meet September sales expectations despite higher gasoline prices," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co.
Stocks started the session substantially higher after the positive report on business activity in the services sector. The Institute for Supply Management (search), which surveys 370 U.S. businesses, said its non-manufacturing index rose to 65 percent in August from 60.5 percent in July. Any reading above 50 indicates the sector is expanding; the August reading was the best since April 2004.
Hopes that interest rates would stop climbing also buoyed the markets. Last week's softer-than-expected economic data reinforced some traders' belief that the Federal Reserve (search) would stop its year-plus campaign of short-term interest rate hikes earlier than it had planned, said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco.
Last week's data included a Commerce Department report that Americans spent more than they earned in July for just the second time in 46 years. The Institute for Supply Management manufacturing index fell in August and a monthly index of industrial purchasing activity from Chicago also dropped dramatically.
Koesterich, however, is skeptical about whether traders' views on the Fed are correct. As far as the economy goes, "I'm not sure anything has necessarily changed," he said. "We have seen some economic deceleration, but it doesn't mean the Fed is going to pause."
Cisco Systems Inc. (CSCO) jumped 2.7 percent to $18.20 after the network equipment maker's stock was upgraded to "overweight" by Lehman Brothers.
"The Lehman upgrade of Cisco will have an initial positive impact on the tech sector," said Richard Skaggs, portfolio manager at Loomis Sayles in Boston.
Industrial companies, which are considered benchmarks of the U.S. economy, also got a boost from lower oil. 3M Co. (MMM) was up 1.7 percent at $72.70 and chemical maker DuPont Co. (DD) rose 1.6 percent to $39.48.
Big fuel consumers, such as airlines, rose, with Delta Air Lines Inc. climbing 12 percent to $1.12 and Southwest Airlines Co. (LUV) rising 3 percent to $13.92.
Restaurant stocks rose after analysts said share price weakness in the face of Hurricane Katrina and a sharp spike in gasoline prices posed an opportunity for investors. The Standard & Poor's Restaurants Index was up nearly 2 percent.
Dow industrials Home Depot and Coca-Cola climbed on expectation of rebuilding after Katrina and an analyst's upgrade, respectively. Home Depot (HD) rose $1.38 to $41.71 after the company said five of its stores remained closed because of Katrina, but it hopes to reopen three by week's end.
Coca-Cola (KO) gained 62 cents to $44.52 after Banc of America Securities boosted its rating on the stock to "buy" from "neutral," citing potential upside to the firm's fiscal 2006 earnings estimate and room for the stock's valuation to rise.
Wal-Mart (WMT) said only 18 of its stores and one call center remain closed following Katrina, a major improvement from when Katrina hit, initially closing 126 of it facilities. Eighty-nine facilities have reported damage with only nine having major damage. The shuttered stores represent a minor portion of the world's largest retailer's 3,800 outlets. The company also reiterated that Hurricane Katrina could hurt its sales for September. Wal-Mart climbed $1.14 to $45.69
Troubled vaccine maker Chiron Corp. (CHIR) jumped 72 cents to $43.51 after its board rejected an all-cash takeover offer from Novartis AG, saying the offer is inadequate. On Sept. 1, Novartis had offered to buy about 58 percent of Chiron shares it does not already own at $40 per share. Novartis added 18 cents to $49.28.
Northwest Airlines Corp. (NWAC) fell 4 cents to $3.59 even after Standard & Poor's downgraded its debt further into junk status. The nation's fourth-largest carrier, whose mechanics are on strike, said Thursday it is running out of time to avoid bankruptcy.
Bonds fell as stocks rose, with the yield on the 10-year Treasury note rising to 4.09 percent from 4.02 percent late Friday. The U.S. dollar was mixed against other major currencies. Gold prices were lower.
On the NYSE, about 1.42 billion shares were traded, below the 1.46 billion daily average for last year and on Nasdaq 1.44 billion shares changed hands, below the 1.81 billion daily average.
Advancers outpaced decliners by a ratio of 2 to 1 on both the NYSE and Nasdaq.
The Russell 2000 index of smaller companies rose 11.15, or 1.68 percent, to 674.48.
Overseas, Japan's Nikkei stock average fell 0.28 percent. Britain's FTSE 100 rose 0.4 percent, Germany's DAX index rose 1.19 percent, and France's CAC-40 rose 0.96 percent.
Reuters and the Associated Press contributed to this report.