Wall Street rallies as Fed cut, banks drive gains

By Justin Grant

NEW YORK (Reuters) - Stocks rang up their biggest one-day gains in more than five years as the S&P 500 jumped on Tuesday after the Fed's deep interest-rate cut and solid results from two top investment banks reassured investors shocked by Bear Stearns' sudden downfall.

The Fed fulfilled expectations by cutting its benchmark rate to the lowest since February 2005. Stocks rallied, with the S&P and the Nasdaq closing up more than 4 percent, even though policy makers opted for a slightly less aggressive rate reduction than some on Wall Street were expecting.

The S&P index of financial shares achieved its best day in eight years, climbing 8.5 percent.

Goldman Sachs and Lehman Brothers posted lower quarterly earnings, but both topped forecasts. The results provided evidence that bank profits were intact despite the escalating credit crisis, which forced the fire- sale deal for Bear Stearns over the weekend. Lehman shares soared 46.4 percent to $46.49 and Goldman rose 16.3 percent to $175.59.

The top 25 gainers on the New York Stock Exchange included some of the biggest losers in the subprime mortgage meltdown. Mortgage companies Fannie Mae and Freddie Mac, home builder Hovnanian Enterprises and the home lender most associated with the credit crunch, Countrywide Financial Corp, all ranked near the top of the NYSE's leading gainers' list.

"There's been tremendous panic. People throwing the baby out with the bath water, preparing for a Category 5 hurricane, and that presents a buying opportunity," said Chip Hanlon, president of Delta Global Advisors, Inc., in Huntington Beach, California.

"The economy will likely recover later this year, based on what the Fed is doing. The market is rallying today. It got so oversold that I won't be surprised to see it rally further."

The Dow Jones industrial average climbed 420.41 points, or 3.51 percent, to end at 12,392.66. The Standard & Poor's 500 Index rose 54.14 points, or 4.24 percent, to 1,330.74. The Nasdaq Composite Index <.IXIC> soared 91.25 points, or 4.19 percent, to 2,268.26.

The Nasdaq surged to its best one-day percentage advance since March 2003.

Shares of Fannie Mae rose 27.1 percent to $28.22, while Freddie Mac climbed 26.2 percent to $26.02.

Hovnanian rose 18.4 percent to $10.17 and Countrywide surged 24.9 percent to $5.11.

Trading was heavy on the New York Stock Exchange, with about 1.95 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.36 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 7 to 1 and by more than 3 to 1 on Nasdaq.

(Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)

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