Fed Day Rally Fizzles; Dow Still Hits 2-Year High

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The Dow landed at its highest level since September 2008 on Tuesday, but an early rally faded as the Fed’s policy meeting proved to be a nonevent and Treasury yields hit seven-month highs.

Today’s Markets

The Dow Jones Industrial Average rose 47.98 points, or 0.42%, to 11476.54, the Standard & Poor's 500 gained 1.13 points, or 0.09%, to 1241.59 and the Nasdaq Composite picked up 2.81 points, or 0.11%, to 2627.72. The FOX 50 added 1.73 points, or 0.19%, to 889.18.

The late-day selloff from session highs, Wall Street’s second in as many days, erased much of an 86-point rally on the Dow that had been fueled by stronger-than-expected November retail sales.

“The market was due for a pause and people are using the [quiet Fed meeting] to take some chips off the table. The risk-off trade has been gaining some momentum,” said Michael James, managing director of equity trading at Wedbush Securities.

The selling coincided with a slide in the bond market in the wake of the Federal Reserve deciding to keep interest rates at their historically low levels, as expected. The yield on the 10-year note settled near its highest level since May.

“For the first time in this whole multi year experiment on the part of the Fed, the bond market has taken over and has pushed back against the Fed's goal and desire of keeping interest rates low,” Peter Boockvar, equity strategist at Miller Tabak, wrote in a note.

Still, the Dow closed at its highest level since September 3, 2010, joining its peers by making fresh 2010 highs. Most of the benchmark index's 30 stocks made headway, led by defensive plays AT&T (NYSE:T) and Kraft (NYSE:KFT). The index's weakest links were JPMorgan Chase (NYSE:JPM) and Coca-Cola (NYSE:KO).

The Nasdaq Composite, which had its eight-day win streak snapped on Monday, eked out a mini gain as a big rally from Amgen (NASDAQ:AMGN) offset weakness from some tech stocks like Research in Motion (NASDAQ:RIMM).

Wall Street mostly yawned at the Fed's policy statement, which showed the central bank voted 10-1 to leave interest rates at their ultralow level. The central bank also didn't announce any changes to its controversial $600 billion quantitative easing plan, which is aimed at boosting the economy and avoiding a deflationary spiral by lowering interest rates.

The recovery is continuing, "though at a rate that has been insufficient to bring down unemployment", the Fed said in its statement.

Yet the Fed's inability to keep interest rates from rising was on display immediately after the meeting ended, with the yield on Treasurys hitting seven-month highs. The selloff in the bond market is partly a reflection of increased optimism about the economic recovery. However, it is also likely to have a dampening effect on the fragile economy by increasing borrowing costs for companies and individuals.

“Equity investors are finally paying a little more attention to the hammering going on in the bond market,” said James.

Economic Picture in Focus

Underscoring the growing economic optimism on Wall Street, JPMorgan Chase hiked its fourth-quarter gross domestic product estimate from 2.5% to 3.5%. JPMorgan cited the November retail sales report and stronger inventory building.

Wall Street had a positive reaction earlier in the day after the Commerce Department said U.S. retail sales rose 0.8% in November. Economists had forecasted a 0.6% increase in sales.

The upbeat retail sales report has “stoked some optimism that the recovery is solidifying,” said Nick Kalivas, vice president of financial research at MF Global.

The Labor Department said producer prices jumped by 0.8% in November, hotter than the 0.6% Wall Street had been looking for. Excluding volatile food and energy prices, wholesale inflation was up an in-line 0.3%. The report could ease concerns by some, including Fed chief Ben Bernanke, about deflation.

Also, the Commerce Department said business inventories increased by 0.7% in October, the 10th straight monthly rise and the biggest in seven months.

In the commodities complex, crude oil fell 33 cents a barrel, or 0.37%, to $88.28. Gold rose $6.30 a troy ounce, or 0.45%, to $1,403.60.

Wall Street managed to mostly shrug off Best Buy, which tumbled 15% after posting unexpected declines in third-quarter profits and sales and taking an axe to its guidance. Even the upper end of the electronics retailer’s fiscal 2011 outlook would trail the Street’s view by 19 cents a share. Shares of RadioShack (NYSE:RSH) also lost ground on the news.

Corporate Movers

Yahoo! (NASDAQ:YHOO) is poised to cut as many as 650 jobs, or nearly 5% of its workforce, as early as Tuesday, The Wall Street Journal reported.

Amgen (NASDAQ:AMGN) rallied 5% after the biotech drug maker said a late-stage trial study of its cancer drug Xgeva showed it helped patients live considerably longer with prostate cancer than a placebo.

HCP (NYSE:HCP) gobbled up most of the real-estate assets from nursing and assisted living center company HCR ManorCare for $6.1 billion, marking one of the biggest land grabs of 2010. The transaction also represents one of the biggest private-equity deals of the year as HCR ManorCare is controlled by private-equity giant Carlyle Group.

Global Markets

The U.K.'s FTSE 100 rose 0.52% to 5891.21, France's CAC 40 added 0.27% to 3902.87 and Germany's DAX fell 0.03% to 7027.40.

In Asia, Tokyo's Nikkei 225 gained 0.22% to 10316.80, Hong Kong's Hang Seng advanced 0.49% to 23431.20 and China's Shanghai Composite added 0.14% to 2927.08.