"The market is saying, `whatever is in that report, it's not as bad as what could've been,' " said Dan Mathisson, head trader at DE Shaw Securities. "It looks as though Clinton's chances of staying in office have improved. Investors want to see stability, so what's good for Clinton is good for the market."
Stocks extended gains after the Starr Report was released. The Dow Jones Industrial Average rose 179.96, or 2.4 per cent, to 7,795.50, climbing about 150 points in an hour.
Upbeat forecasts from Intel and American Express offered investors some rare good news after eight weeks of declines.
US stocks began a two-month plunge in mid-July on concern that corporate profits are being cut by economic slumps in Asia, Russia and Latin America. But this week the Dow rose 2.0 per cent and the S&P 500 added 3.6 per cent. Most of the week's gains came on Tuesday when the average jumped 380 points, its biggest one-day point gain ever, after Federal Reserve Chairman Alan Greenspan signalled the possibility of a reduction in interest rates if the US economy slows.
The rally that drove long-term bond yields to record lows last week could reverse course unless the Federal Reserve cuts interest rates by at least half a percentage point by the end of the year.
Yields on Treasuries due from two to 30 years are all below the Fed's 5.5 per cent target, the first time that's happened since 1990. Some investors expect the Fed to make a half-point cut in one swoop on 29 September - something that hasn't happened since July 1992. They say the Fed needs to lower rates to help quell financial turmoil overseas and bolster US growth.
If Fed officials do that, "they will have effectively confirmed what the market has done," said Closson Vaughan at Columbia Partners in Washington. "If the Fed eases only 25 basis points and says it's only an insurance- policy-type step, two-year notes are going to get killed," he added.
Two-year notes, among the most sensitive to Fed rate policy, now yield 4.68 per cent. "It's dangerous in here," given how low yields have fallen, said Jim Somers at Martindale Andres in Pennsylvania. "The Fed has got to ease probably 100 basis points to support the levels we're at right now - at least."