After falling nearly a full percentage point in early morning trading, the Dow (INDEX: ^DJI) rocketed back to close up 81 points (or 0.64%).
Why the change of heart, you ask? The Federal Reserve announced that it expects to be holding short-term interest rates near zero through 2014.
To be frank, it's a bit silly -- though not surprising -- that the market rallied on this news. No one expects us to be back near full employment by that time, and with the economy in a liquidity trap, core inflation won't be up, either. That means that the conditions requiring low interest rates will still be in place two years from now.
Cyclical Dow components like Caterpillar (NYS: CAT) and Alcoa (NYS: AA) rallied strongly on the news, as they are especially susceptible to economic conditions. With the Fed more publicly committed to low rates, growth prospects have improved.
Mortgage REITs, led by Chimera (NYS: CIM) and Annaly Capital (NYS: NLY) , also jumped. Low borrowing costs have juiced their interest-rate spreads -- and hence their yields -- making them popular among dividend-thirsty investors. But REIT investors and, to a lesser extent, banking investors might not want to get too excited about the news just yet. If the announcement is a sign the Fed is becoming increasingly concerned about unemployment (it also revised its GDP growth estimates downward), that increases the likelihood it might take further actions to boost economic growth, like another Operation Twist or QE. And those actions might involve driving long-term rates down further, something that definitely wouldn't help spreads.
The Dow surged today, but it's important for us to remember that what happens to stocks on a day-to-day basis matters far less than their long-term performance. If you're interested in one stock that our chief investment officer picked to crush the market in 2012, check out our brand-new report, "The Motley Fool's Top Stock for 2012." It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company for free.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned. The Motley Fool owns shares of Chimera Investment and Annaly Capital Management.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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