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Rally recharged
Bulls roam free on Wall Street as strong economic news, falling oil prices unleash a new rally.
December 1, 2004: 2:57 PM EST

NEW YORK (CNN/Money) - Stocks extended their big rally in late afternoon trading Wednesday as a slew of reports pointed to solid economic growth in the fourth quarter.

A big drop in oil prices also fueled the market's gains.

With less than an hour left in the session, the Dow Jones industrial average (up 133.82 to 10,561.84, Charts) and the broader Standard & Poor's 500 index (up 14.02 to 1,187.84, Charts) jumped 1.2 percent.

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The Nasdaq composite index (up 33.71 to 2,130.52, Charts) scored the biggest gains, advancing 1.6 percent.

Larry Wachtel, senior vice president and market analyst for Wachovia Securities, pinned the session's strong performance on robust economic news and lower oil prices, but noted that there are also some less obvious reasons for the stock market rally.

"This is the first day of the month, you may have seen some end-of-the-month portfolio selling dissipating," Wachtel said. "And this is the day that Microsoft is distributing $33 billion in cash, so there is some anticipation of that finding its way back to the market."

Consumer spending surged 0.7 percent in October, the Commerce Department said, well ahead of Wall Street's predictions for a 0.4 percent increase.

Personal income rose 0.6 percent to its largest one-month gain since May and was slightly above consensus estimates for a 0.5 percent increase.

Another key report that investors were looking out for was the Institute for Supply Management's latest manufacturing survey. The manufacturing sector continued to expand in November, with the ISM index jumping to 57.8 from 56.8 in October. Economists polled by had predicted a reading of 57. An ISM number above 50 signifies growth in that sector.

And in a separate report, the Commerce Department said construction spending in October was relatively flat -- though still at record high levels -- as government spending compensated for a decline in residential development.

The Federal Reserve's own beige book, an anecdotal look at economic conditions compiled by its regional banks, said the economy is moving along at a reasonable clip, thanks in part to an improving labor market.

Peter Cardillo, chief market analyst for SW Bach, said the day's news will probably trigger the Fed to raise interest rates by 25 basis points in December and again sometime in the first quarter. A weaker dollar could spark the need for a more aggressive stance by the central bank as it tries to stave off inflation.

"If the dollar continues to fall, and we end up in a free fall, at one point the Fed will have to be more aggressive," Cardillo added. "They may have to respond by raising interest rates by half a point."

Oil traders took note of a report from the Energy Information Administration (EIA) showing that U.S. oil inventories rose. U.S. crude futures retreated $3.36 to $45.45 a barrel on the New York Mercantile Exchange, while Brent oil futures slipped $2.85 to $42.55 a barrel in London.
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