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Stocks rallied and pushed the S&P 500 to a fresh five-and-a-half year closing high, as investors appeared optimistic that a decline in the price of oil over the last two months will suffice to sustain consumer spending and offset a slowing housing market. Investors are confident that the Federal Reserve won’t lift interest rates again anytime soon. There was notable strength in the technology sector, but shares of Altria Group Inc. sank as the company and other tobacco makers faced a new lawsuit.

Today, the Dow Jones industrial average closed up 67.71 or 0.59% to 11,575.81, the Standard & Poor’s 500 closed up 11.59 or 0.88% to 1,326.37, and the Nasdaq composite closed up 30.14 or 1.36% to 2,249.07.

Market breadth was positive. On the New York Stock Exchange, winners topped losers 11 to 5 on volume of 1.748 billion shares. On the Nasdaq, advancers beat decliners 18 to 11 on volume of 1.871 billion shares.

Federal Reserve Bank of Dallas President Richard Fisher, reiterated the Fed’s recent opinion that a slowing economy will take the edge off inflation, but that if this proves not to be the case, the Fed will take action. While there is a “serious correction” taking place in the housing sector, but outside of that, the economy is “healthy and robust”.

Overall, the message of the market is that the Fed is going to start cutting interest rates early next year, and this would help ensure a so-called “soft landing”. The steep decline in commodity prices, the moderate reads on inflation and the collapse in the housing market, all point in this direction. While the Federal Reserve continues to say publicly that it is concerned about inflation and could have to raise rates again, the financial markets see it differently.

In data news, existing home sales fell, but the decline for the month was not as steep as predicted. Home sales fell to an annual pace of 6.30 million and is down 12.6% from last year. The inventory of homes on the market is up 37% in August to 3.9 million. This report did little to dispel the view that the housing market is slowing down.

Shares of Walgreen Co. fell 5.2% to close at $44.47, despite reporting a 25% rise in fourth-quarter net income. The company’s stock has lost about 10% of its value since when Wal-Mart Stores Inc. said it would slash prices on hundreds of generic drugs. The company profit rose to $412.3 million, from $329 million a year ago. Sales for the quarter rose 16% to $12.17 billion from $10.49 billion a year ago. Same-store sales rose 9.7%, and the total prescription sales rose 18%.

Stock of Altria Group Inc. closed down $5.31 fell 6.4% to $77.01 after a federal judge granted class-action status to a racketeering lawsuit against Philip Morris USA and several other large makers of “light” and “low tar” cigarettes. Therefore, a potential $200 billion lawsuit against tobacco companies can proceed under class-action status. The suit accuses the companies of misleading consumers by labeling certain brands as light or low tar. Other tobacco makers cited in the lawsuit are Reynolds American, Loews Corp, Vector Group and British American Tobacco.

Shares of Hewlett-Packard Co. rose $0.64 or 1.7% to $35.75 after CEO Mark Hurd said that he would immediately assume the role of chairman after Chairwoman Patricia Dunn resigned from the board over a spying scandal. Dunn, who initially had said she would step down in January, will be replaced immediately. Dunn has been under pressure because of questionable practices used in an investigation she authorized to discover who was leaking boardroom information to the media.
U.S. light crude oil for November delivery rose 90 cents to $61.45 a barrel on the New York Mercantile Exchange, after touching $59.65 - its lowest level in more than six months. OPEC has voiced concerns over the recent price decline, raising the prospect of a production cut.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter
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