By Eric Martin
Feb. 2 (Bloomberg) -- U.S. stocks rose the most in five years after the Federal Reserve's second interest rate cut in nine days boosted banks, homebuilders and retailers.
Washington Mutual Inc., the largest savings and loan, Lennar Corp., the third-biggest homebuilder, and Wal-Mart Stores Inc., the largest discount chain, helped lead gains. All 10 sectors and 461 stocks in the S&P 500 advanced after the half-point reduction in the Fed's target for overnight loans between banks bolstered speculation that a recession may be averted.
``The Fed finally stepped up,'' said Jeffrey Kleintop, who helps oversee about $163 billion as chief market strategist at LPL Financial Group in Boston. ``They gave us what the economy really needed and what investors needed to get their confidence back.''
The S&P 500 climbed 4.9 percent for the week, trimming its yearly loss to 5 percent. The benchmark for U.S. equities has risen for two consecutive weeks after falling 9.8 percent through Jan. 18, its worst-ever start for a year. The Dow Jones Industrial Average added 4.4 percent and the Nasdaq Composite Index increased 3.8 percent, boosted by Microsoft Corp.'s bid for Yahoo! Inc., owner of the most-visited U.S. Web site.
The drop in interest rates to 3 percent overshadowed the first decrease in jobs since 2003, the biggest yearly drop in new-home sales on record and fourth-quarter economic growth that was half the rate economists forecast. Fed policy makers have cut the Fed funds rate by 1.25 percentage points to 3 percent since Jan. 22, the fastest reduction since 1990.
Citigroup Inc., the biggest U.S. bank, added 11 percent to $29.69. Bank of America Corp., the second-biggest U.S. bank, gained 14 percent to $45.03. JPMorgan Chase & Co., the third- largest U.S. bank, increased 11 percent to $48.25.
Pulte Homes Inc. pushed homebuilders to a four-month high after forecasting a narrower loss than analysts estimated. The builder of Del Webb-brand homes for retirees also reported fourth-quarter revenue that topped estimates. Pulte jumped 21 percent to $15.84. The stock has rallied 60 percent this year, the second-best gain in the S&P 500, after retreating 68 percent in 2007.
Lennar surged 26 percent to $21.40.
Microsoft bid $44.6 billion for Yahoo, offering shareholders cash or stock in the world's largest software maker. Yahoo gained 29 percent to $28.38 for the weak, erasing its loss from a sales forecast on Jan. 30 that disappointed investors. The unsolicited offer may signal a revival of mergers and acquisitions as corporate buyers exploit falling stock prices and fill a void left by private-equity firms, analysts said.
Ambac Financial Group Inc. gained 14 percent to $13.20 on reports that eight banks are working with regulators to rescue the second-largest bond insurer. Investor concern that Ambac and its larger rival, MBIA Inc., may lose their AAA credit ratings contributed to larger-than-average price swings in the U.S. stock market. MBIA added 15 percent to $16.36.
Washington Mutual soared 35 percent to $21.82. The company, which reported its first quarterly loss since 1997 this month after a $1.6 billion writedown in its home-loan unit, said it expects income to increase as the Federal Reserve cuts interest rates.
Boeing Co., the world's second-biggest commercial airplane maker, rose 7.4 percent to $82.76. Caterpillar Inc., the largest producer of bulldozers and excavators, increased 8.8 percent to $71.76. They helped lead industrial companies higher after orders for durable goods rose more than forecast in December.
Telephone companies gained on a report Sprint Nextel Corp., the third-biggest U.S. wireless carrier, may enter a joint venture with wireless Internet company Clearwire Corp. Sprint jumped 11 percent to $10.44.
E*Trade Financial Corp. surged 32 percent to $4.97 as the chief executive officer, chairman and the rest of the board bought shares of the online broker that tumbled 84 percent last year. E*Trade predicted a return to profitability last week after reporting a record $1.71 billion fourth-quarter loss. The company plans to stem customer defections by investing $85 million this year in marketing and customer service, including $4 million for advertisements during this week's Super Bowl.
Members of the S&P 500 scheduled to report earnings this week include MetLife Inc., the biggest U.S. life insurer; Walt Disney Co., the second-largest U.S. media company; D.R. Horton Inc., the fourth-largest U.S. homebuilder; and Cisco Systems Inc., the world's largest network equipment maker and the second- largest member of the Nasdaq.
Economic reports will probably show service industries in the U.S. expanded in January at the slowest pace in almost a year as home sales and construction declined, according to economists surveyed by Bloomberg. The U.S. House on Jan. 29 approved a $146 billion economic stimulus plan aimed at averting a recession in part by sending tax-rebate checks to about 111 million Americans.
The S&P 500 has advanced 3 percent on average during the first six months of similar Fed easing cycles and posted a 14 percent average gain during the entire cycle, Bespoke Investment Group LLC wrote in a research note. The S&P 500 has dropped about 3.5 percent since Aug. 17, when the Federal Open Market Committee unexpectedly cut the so-called discount rate by 0.5 percentage point to 5.75 percent.
``The bull case is that rates are coming down and that the worst is behind us,'' said Mike Morcos, who helps manage about $1.4 billion at Old Second Wealth Management in Aurora, Illinois. ``The Fed easing is going to lead us on the road to recovery.''
The Russell 2000 Index, whose members have a median market value of $557 million, gained 6.1 percent to 730.50 this week. The benchmark for small U.S. stocks has outperformed the S&P 500 for the last three weeks, the longest streak since March.