Dow soars on rate cut by central banks

A move by the world's central banks to lower the cost of borrowing exhilarated investors yesterday, sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.

It was the Dow's biggest gain since March 2009 and the seventh-largest, in point terms, of all time.

Large U.S. banks were among the top performers, jumping as much as 11 percent.

"The central banks of the world have resolved that there will not be a liquidity shortage," said David Kotok, chairman and chief investment officer of Cumberland Advisors. "They don't want to take small steps and do anything incrementally, but make a big bold move that is credible."

Yesterday's action by the central banks of Europe, the United States, Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.

Amid the market's excitement, many doubts loomed. Some analysts cautioned that the banks did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. They only bought time for political leaders.

"It is a short-term solution," said Jack Ablin, chief investment officer at Harris Private Bank.

Worries about the financial system -- and the reluctance of the European Central Bank to intervene -- have caused borrowing rates for European nations to skyrocket. Yesterday's decision reduced the rates banks pay to borrow dollars -- a move that aims to make loans cheaper so that banks can continue to operate smoothly.

European banks rely on dollars to cover loans they have promised to consumers and businesses and pay for investments in U.S. credit markets. They traditionally have tapped short-term funding from U.S. money market mutual funds and other banks. But money market funds have been pulling dollars from Europe in recent months, and lending between banks has dried up.

The Dow rose 4.24 percent to settle at 12,045.68 Wednesday. It has more than gained back the 564-point slump it had last week. It is up 813 points, or 7.3 percent, so far this week.

A string of positive U.S. economic news also propelled the market higher. An index measuring manufacturing in the Midwest surged to a seven-month high; private company hiring jumped in November to the highest level this year, according to payroll company ADP; and the number of contracts to buy homes jumped in October to the highest level in a year.