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A benign retail inflation report and a drop in crude-oil prices lifted the Dow Jones Industrial Average to its best level in more than 4 1/2 years. The lower Treasury bond yields and a moderate read on inflation helped spark a broad advance.

Today, the Dow Jones industrial average closed up 68.11 or 0.6% to 11,137.17, the Standard & Poor’s 500 index closed up 9.63 or 0.8% to 1,292.67, and the Nasdaq composite index closed up 20.21 or 0.9% to 2,283.17.

Market breadth was positive. On the New York Stock Exchange, winners topped losers two to one on volume of 1.61 billion shares. On the Nasdaq, advancers topped decliners 18 to 11 on volume of 1.85 billion shares.

Today’s market reaction to drop in oil prices and inflation report demonstrates how much the market right now is reacting to the day-to-day events. The tone is set by the Federal Reserve which is reacting to data and so is the market. Investors appear to be scouring the daily economic reads for hints on when the rate hike shall cease.

However, relatively good corporate news this week, and the fact that oil has not risen much since falling below $60 last week, show that the market is ready to bounce back. Long-term interest rates are set to rise because the market, in spite of the latest inflation data, is too optimistic about prospects for keeping inflation under control. While the core CPI rose in line with expectations, the headline consumer prices rose a larger-than-expected 0.7%, led by higher energy, food and housing costs. This gives the Federal Reserve reason to keep lifting key short-term interest rates to keep inflation under control.

Roger Ferguson, the No. 2 official at the Federal Reserve during the final eight years of Alan Greenspan’s tenure, has announced that he has decided to resign from the board of the central bank, effective at the end of April. He had been mentioned as a possible replacement for Greenspan but was passed over in favor of White House economic adviser Ben Bernanke.

The stars were the financials with American Express closing up $0.98 to $54.84, Citigroup gaining $0.71 to $46.88, JP Morgan Chase closing up $0.71 to $41.41, and the Philly/KBW Bank index closing up 2.26 or 2.2% to 107.33. Merck closed up $0.33 to $35.92, and Pfizer closed up $0.55 to $26.19. Boeing closed up $1.34 to $74.39, and Honeywell gained $0.61 to $42.03. The Dow Jones Home Construction index closed up $35.43 or 4% to $930.00, and the Philadelphia Semiconductor ended up 7.01 or 1.3% to 530.78.

The most prominent loser today was Intel that closed down $0.47 or 2.3% to $20.15. The stock was downgraded by ThinkEquity to “sell” from “accumulate”. The brokerage said Intel is losing market share — especially in servers — and could be hurt by pricing cuts that it will likely pursue in order to counter the losses in market share.

On the New York Mercantile Exchange, the benchmark April crude contract ended down $1.73 at $61.01 a barrel ahead of Thursday’s release of weekly domestic supply data. Analysts expect the report to show the nation well supplied with oil and petroleum products.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter