U.S. Stocks Surge Most Since March on Expectations of Fed Cut

Dec. 1 -- U.S. stocks posted their biggest weekly gain since March after Federal Reserve officials including Chairman Ben S. Bernanke signaled more interest rate cuts may be on the way.

Financial stocks surged on the prospect of lower borrowing costs. Citigroup Inc. climbed after the biggest U.S. bank received a $7.5 billion investment from Abu Dhabi. Freddie Mac soared after the second-biggest provider of money for U.S. home loans announced plans to sell $6 billion in preferred stock and cut its dividend in half to shore up capital.

Traders boosted bets that Fed policy makers will cut the benchmark lending rate by as much as 0.5 point to 4 percent when they meet on Dec. 11, trading in futures contracts shows. Stocks rose four straight days after a decline on Nov. 26 caused the Standard & Poor's 500 Index to retreat 10 percent from its October record, the first so-called correction in four years.

``The Fed knows the economy is slowing and there are still credit issues out there, so they're going to use all the tools they have to ensure financial markets operate well,'' said Kurt Brunner who helps manage $1.5 billion at Swarthmore Group Inc. in Philadelphia. ``Are equities still attractive? Yes, with interest rates lower.''

The S&P 500 added 2.8 percent to 1,481.14 this week. The Dow Jones Industrial Average rose 3 percent to 13,371.72. The Nasdaq Composite Index climbed 2.5 percent to 2,660.96. Even with this week's advance, the S&P 500 and the Dow had the biggest monthly declines in five years. The Russell 2000 Index of small-company shares rose for the first time in five weeks, advancing 1.7 percent to 767.77.

`Exceptionally Alert'

Central banks need to be ``exceptionally alert and flexible,'' Bernanke said Nov. 29, bolstering speculation that the Fed will reduce interest rates at a third consecutive meeting. He echoed earlier comments by Fed Vice Chairman Donald Kohn that financial ``turbulence'' needs to be weighed into the next rate decision.

``This kind of one-two punch of Kohn and Bernanke suggests there is some leadership from the chairman and vice chairman at the Fed with dealing with what's been a turbulent market,'' said Alan Gayle, who helps manage about $70 billion as senior investment strategist at Trusco Capital Management in Richmond, Virginia. ``We think the market can move higher.''

Homebuilders Jump

An S&P index of 16 homebuilders surged 8.7 percent yesterday, the most since December 2000, as investors speculated that the government will release a plan to keep people from losing their homes. U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led Nov. 29.

Two-year Treasury yields had their seventh straight weekly decline, falling to 3 percent, on the outlook for more rate cuts. The 10-year note's yield slipped to 3.94 percent. Yields move inversely to prices.

Financial stocks in the S&P 500 advanced 5.6 percent for the biggest gain since March 2003. All 10 industry groups in the S&P 500 climbed.

Citigroup jumped 5.1 percent to $33.30. State-owned Abu Dhabi Investment Authority will buy securities that convert to stock and yield 11 percent a year. That's almost double the interest Citigroup offers bond investors, underscoring the company's need for cash after mortgage losses wiped out almost half its market value.

Freddie Mac

Freddie Mac increased 32 percent to $35.07, the biggest weekly gain since Bloomberg began tracking the data in December 1988. Losses from defaulted mortgages eroded company's core capital to only $600 million above the government-required minimum last quarter, prompting Freddie Mac to sell shares and halve its dividend to 25 cents.

Tenet Healthcare Corp. rose the most in the S&P 500, adding 39 percent to $5.51. The owner of 56 hospitals announced a new coverage agreement with UnitedHealth Group Inc., the largest U.S. health insurance company.

Employers in the U.S. probably hired fewer workers in November and the unemployment rate likely rose to a 16-month high, reflecting less confidence in the economic expansion, according to economists before a report next week.