Why the Dow Jumped 300 Points

Why the Dow Jumped 300 Points

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Go figure. At the end of a year when just a whisper from a Federal Reserve regional president on the coming stimulus taper caused stocks to sell off, the market jumped today after the central bank said it would begin cutting back the $85 billion-a-month bond-buying program. The Dow Jones Industrial Average flew up 293 points, or 1.8%, all of it coming after the 2 p.m. announcement, while the S&P 500 finished up 1.7%. The reaction was the opposite of the market's back in September, when stocks jumped on what was considered the Fed's surprise decision.

The Fed said it would reduce its monthly purchases to $75 billion but also said benchmark interest rates would remain near zero for a significant period of time after unemployment falls to 6.5%. Investors seemed to interpret the news as a sign that the economy was sufficiently strong, after two straight months of 200,000-plus jobs growth, to warrant a cutback to the stimulus program. In other economic news, housing reports for November were especially strong with housing starts jumping to an annual rate of 1.091 million, easily beating expectations of 950,000 and the previous month's total of 889,000. The National Association of Home Builders' Housing Market Index was a 58, better than 54 in October.

Homebuilder Lennar was a big winner today as shares gained 6.3% not just because of macro-level housing data, but because it crushed earnings estimates in its quarterly report earlier in the day. Lennar delivered an EPS of $0.73, versus expectations of $0.62, while revenue shot up 41.8% to $1.92 billion. Analysts had been looking for sales at $1.88 billion. The Fed's promise to extend ultra-low interest rates also figures to keep mortgage rates down, further providing a boon to the housing sector. Even though the taper may push rates up, the effect of the market seems to already have taken the effect of the cutback into the taper.

Moving the opposite direction was Ford , which fell 6.3% after it released a warning about earnings growth. The carmaker said it expects flat revenue growth next year, and sees operating margin compressing, meaning profits are likely to fall. Europe was once again cited as the culprit, as the company said it may struggle to achieve its long-term goal of 8%-9% operating margins.

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