NEW YORK MARKET: Stocks rally as Fed decides to wait and see

WITH the Federal Reserve's expected interest rate increase out of the way, money managers see a summer rally and more new highs for US stocks after their best week since October 1988. "It's off to the races again," said Henry Cavanna, fund manager at JP Morgan. "Everyone knew the Fed would raise rates, and the concern was it might do more. But it said the best possible thing by removing the bias [to tighten]."

The surprise announcement that the Fed would wait for fresh evidence of accelerating inflation before raising rates again means investors will focus on earnings in coming weeks. Mr Cavanna sees a broad-based rally.

Stocks may even have their best rally since the summer of 1989; the only time in the last decade that the S&P 500 index gained 10 per cent between Independence Day and the Labor Day weekend in September.

And although the Dow Jones, Nasdaq and S&P 500 all touched new highs last week, with "investors willing to see improvement in forward earnings", Mr Cavanna is optimistic that there are more records ahead.

For the week, the Dow industrials rose 5.6 per cent, closing at a record 11,139.24 on Friday, after advancing for six straight days. The S&P 500 jumped 5.8 per cent, and the Nasdaq climbed 7.4 per cent. All three indexes had their highest percentage gains in any week since last October.

US equity markets will be closed on Monday for Independence Day.

Analysts are forecasting that profit for companies in the S&P 500 will rise 11.4 per cent in the second quarter. That would be the highest growth rate in almost two years. "We are through most of the earnings-warning period, and we are moving into the actual reporting period," said Joseph Stock, manager at Meridian Investment. "Looks like we will come through reasonably well."

Although interest rate concerns eased last week, investors will watch each new economic release for signs of inflation just the same. While the Fed has moved to a neutral bias, some money managers aren't ruling out more rate increases this year.

"Every number is important," said Joseph Williams, manager at Commerce Bank. "In the long term, we remain negative and believe rates will move higher. With world economic growth, the US economy won't slow on this one quarter-point rate increase."