NEW YORK – Wall Street rallied back Wednesday as investors scared off by the Federal Reserve's assessment of the economy in the previous session regained their confidence and bid stocks higher. The Nasdaq composite index reached a five-year high as investors focused on technology and smaller company stocks.
The advance reflects investors' overall optimism about the economy and corporate earnings, although many remain concerned that rising borrowing and energy costs could weigh on both, analysts said.
The Dow on Wednesday rose 61.16, or 0.55 percent, to 11,215.70. The Dow was held back somewhat by General Motors Corp. (GM), which fell after it announced earnings restatements in its mortgage arm.
Broader stock indicators also were higher. The Nasdaq gained 33.32, or 1.45 percent, to 2,337.78, its best close since Feb. 16, 2001, when it closed at 2,425.38. The Standard & Poor's 500 index added 9.66, or 0.75 percent, to 1,302.89.
"I think after yesterday's sell-off, when we turned off the lights and came back in the morning, we got a chance to say, 'You know what? We've overdone it here'", said Arthur Hogan, chief market analyst at Jefferies & Co.
Stocks sold off sharply Tuesday, pulling the Dow Jones industrials down 95 points, after the Fed suggested more interest rate hikes would be needed to head off inflationary pressures. The Fed's comments accompanied its decision to raise its benchmark rate a quarter percentage point to 4.75 percent.
"Clearly yesterday I think there was a response to where the Fed was. There was a hope that they (the Fed) would talk about bringing an end to rate increases, that a balance had been achieved," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "They didn't get that, but it's not cataclysmic because you still have the broader picture."
Despite Wednesday's gains, investors are still concerned that rising bond yields will siphon away interest in stocks. Bond yields, which shot higher Tuesday, rose slightly to 4.80 percent.
"What we're seeing here is a market that's just waiting to assess economic data later in the week and, of course, moving into the earnings season," said Peter Cardillo, chief market analyst at S.W. Bach & Co.
In the longer term, Cardillo said, investors are wondering how long the economy and earnings can sustain their momentum if interest rates continue to rise.
But in the short run, many mutual funds and other institutional investors close their books for the quarter at week's end. With the decline in stocks Tuesday, some large investors likely returned to the market Wednesday to adjust their portfolios and helping propel stocks higher, Cardillo said.
The rebound in stocks came despite another boost in crude oil prices, which rose 38 cents to settle at $66.45 a barrel on the New York Mercantile Exchange.
"The market continues to raise the level of tolerance it has for high energy prices," Hogan said. But "I think if we spend more time here at this level, energy prices will become an issue."
The market's tolerance for General Motors waned after the struggling automaker said late Tuesday it would again restate its financial reports, this time for the financing unit it is trying to sell.
In addition to restating its financial results from 2000 to 2004 Tuesday, GM said it is restating financial results for General Motors Acceptance Corp. from 2003 through the third quarter of 2005, said it was uncertain if it would complete the sale of a majority stake in the unit. Shares of GM fell 60 cents, or 2.6 percent, to $22.15.
Gainers included Sun Microsystems Inc., whose shares rose 22 cents, or 4.4 percent, to $5.25, following an upgrade by Morgan Stanley.
Lear Corp. also rose after the auto interiors maker said it would suspend its dividend, had refinanced its debt and announced it will contribute most of its European interiors business to a joint venture. Lear surged $1.54, or 9.1 percent, to $18.49.
Shares of Boston Properties Inc. jumped $6.25, or 6.9 percent, to $96.87 following the announcement that it will be added to the S&P 500 after trading closes on Friday. Kimco Realty Corp., which will be added to the index on Monday, also saw its shares climb $2.65, or 6.8 percent, to $41.40.
Stocks generally rise when they are added to indexes because index-based mutual funds pick up the shares to keep their portfolios in line with index components.
Caterpillar Inc. (CAT) fell $1.20, or 1.6 percent, to $73.67 after UBS cut its rating on the stock.
Advancing issues outnumbered decliners by nearly 8 to 3 on the New York Stock Exchange, where volume came to 1.58 billion shares, on par with Tuesday's volume.
The Russell 2000 index of smaller companies rose 12.90, or 1.72 percent, to 764.17.
Overseas, Japan's Nikkei stock average rose 1.5 percent. Britain's FTSE 100 gained 0.4 percent, Germany's DAX index rose 0.4 percent, and France's CAC-40 finished up 0.6 percent.