After Fed rally stocks slip late in day

Most of Friday seemed like another day in the Fed rally until stocks slipped in the late afternoon. Stocks are still much higher than might be expected for such a morose economy.

AP
An investor looks at the stock price monitor at a private securities company Friday in Shanghai, China. Friday's decline in stock prices were small but represented a break from the recent rally.

The market took a recess Friday from the Fed rally.

Stocks have been pushing higher for weeks, not because investors think the economy is healed but because of expectations, then confirmation, that the Federal Reserve would step in and try to fix it.

Most of Friday seemed like another day in the Fed rally, which began in earnest early this month, until stocks slipped in the late afternoon. The Dow Jones industrial average rose as much as 50 points before falling into the red in the last half-hour of trading. It's just the fourth day in September that the Dow hasn't managed a gain.

Still, the declines were small. The Dow lost 17.46 points, or 0.1 percent, to 13,579.47. The Standard & Poor's 500 fell in the final minutes of trading, closing down a minuscule 0.11 point, or 0.01 percent, to 1,460.15.

The other main index, the Nasdaq composite, rose four points, or 0.1 percent, to 3,179.96.

Despite the Friday blip, stocks are still much higher than might be expected for such a morose economy. This month, the Dow and the S&P started trading at levels not seen since December 2007, nine months before the fall of Lehman Brothers investment bank. Since the start of June, the Dow has popped nearly 1,200 points.

But the stock market's party mode doesn't mean the underlying economy is healed — far from it. The summer rally is mostly the result of vows by the Federal Reserve and other central banks, like the Bank of Japan and the European Central Bank, to do more to try to help.

But the promises are also an unsettling reminder: The central banks think the economy is so bad that it can't bounce back on its own.

"It's just a big illusion," said Bob Phillips, managing partner at Spectrum Management Group in Indianapolis. The economy, he said, is still a "no man's land" plagued by high unemployment and slow growth.

The signs were obvious Friday: The Labor Department reported that the unemployment rate rose in 26 states last month. The World Trade Organization cut its estimates for growth in global trade for this year and next.

In Europe, Spain was reportedly close to asking for a bailout from Europe. The finance minister of Germany, which has paid for much of the previous bailouts, shot back that Spain doesn't need it.

It's all a reminder that there's only so much the Fed can do. It can't fix the fiscal cliff facing the U.S. government, the higher taxes and government spending cuts that take effect next year unless Congress acts. Others worry that the Fed has used up all the tricks that have previously fueled the stock market.

Phillips said he's worried about "a nasty correction at the first hint of any less-than-stellar news."

Timothy Leach, chief investment officer for U.S. Bank wealth management in San Francisco, said central banks are buying time more than fixing underlying problems.

"But at least they're taking some of the pressure off," Leach added, "allowing policymakers some additional time to try to achieve those real solutions."

Other big moves on the market:

—The price of gold briefly hit a high for 2012 on the news that Spain might get extra bailout funds. Such rescue packages can often cause inflation, and many investors buy gold as a hedge against inflation

—Homebuilder KB Home swung to a quarterly profit by selling pricier homes. KB Home's stock jumped $2.15, or more than 16 percent, to $15.26.

Darden Restaurants, parent of Olive Garden and Red Lobster, reported a higher quarterly profit. The stock rose $2.49, or more than 4 percent, to $57.21.

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