Nasdaq and S&P; 500 Hit Three-Year Highs

Stock prices ended broadly higher Tuesday, lifting the Standard & Poor’s 500 and Nasdaq composite indexes to three-year highs, as investors brushed off a record trade deficit and took comfort in the Federal Reserve’s latest view of the economy.

Wall Street had rallied sharply Monday, boosted by a spate of merger activity. But early Tuesday the market was mostly flat after the government said the nation’s trade deficit surged to a record $55.5 billion in October.

The mood changed soon after Federal Reserve policymakers issued a statement after their final meeting of the year.

As expected, the Fed raised its key short-term interest rate to 2.25% from 2%. More important, analysts said, was that the central bank’s language in its statement painted an optimistic picture of the economy, indicated no concern about inflation and reiterated that additional rate hikes would be “measured.”

The Fed “was saying that the economy is moving along strongly enough that rate hikes won’t slow it too much,” said Brian Williamson, a trader at Boston Co. Asset Management.

Major market indexes rose after the Fed statement at midday and mostly held on to their gains.

The Dow Jones industrial average added 38.13 points, or 0.4%, to 10,676.45, extending Monday’s 95-point gain for its best close since March 1.

Among broader indexes, the Standard & Poor’s 500 hit a three-year high for a second straight session, and it was joined by the technology-dominated Nasdaq composite index, which surpassed its January closing high of 2,153.83.

The S&P; rose 4.70 points, or 0.4%, to 1,203.38, its best level since Aug. 7, 2001. The Nasdaq added 11.34 points, or 0.5%, to 2,159.84, its highest close since June 29, 2001.

The Nasdaq has advanced 23% from its 2004 low on Aug. 12, and is up 7.8% year to date. The index has jumped 94% since its six-year low Oct. 9, 2002.

The Nasdaq rally is “a reflection of the fact that businesses are spending on equipment and technology,” said Robert Christian at Wilmington Trust in Wilmington, Del. Computer stocks “are coming off very depressed levels two years ago and the fundamentals have gotten better. Tech spending will continue right through next year and those stocks will continue to do well,” he said.

Advancing issues outnumbered decliners by almost 2 to 1 on the New York Stock Exchange and by about 3 to 2 on Nasdaq.

In the bond market, the reaction to the Fed’s rate increase and statement was muted. Longer-term yields ended a bit lower. The yield on the 10-year Treasury note fell to 4.12% from 4.15% on Monday.

The two-year T-note was unchanged at 2.96%.

In other trading, the dollar was mixed despite the trade-deficit report. The greenback rose to 105.40 yen in New York from 104.73 on Monday, and the euro was unchanged at $1.331.

Near-term crude oil futures in New York rose 81 cents to $41.82 a barrel as colder-than-normal temperatures prevailed in the Eastern U.S.

In other market highlights:

* Tech stocks were lifted in part by a New York Times report that Symantec was in talks to acquire Veritas Software for $13 billion. Veritas surged $2.19 to $27.38. But Symantec tumbled $5.41 to $27.45 on concerns that the price may be too high.

Among other software issues, McAfee gained 77 cents to $33.39, Adobe Systems rallied $1.40 to $64.16 and Check Point Software Technologies rose $1 to $25.99.

* Intel climbed 61 cents to $23.24 after an RBC Capital Markets analyst raised his sales forecast for next quarter amid signs of growing demand for microchips and a decline in inventories at computer manufacturers.

Advanced Micro Devices, Intel’s biggest rival in producing computer chips, added 43 cents to $22.54. Texas Instruments climbed 65 cents to $24.34.

* Verizon Communications shed 24 cents to $41.04 on reports that the company’s wireless arm would offer $36 billion for Nextel Communications, topping Sprint’s expected $35-billion offer. Nextel was unchanged at $29.99, while Sprint climbed 66 cents to $25.10.

* American Express gained 91 cents to $55.95 after landing a major credit card distribution pact with Citigroup, part of AmEx’s effort to co-market its cards with a variety of financial institutions. Citigroup was up 10 cents at $46.87.

* Goodyear Tire & Rubber jumped 84 cents to $13.91, for the second-biggest percentage advance in the S&P; 500, on a report that the tire maker would raise cash by selling operations not related to tire making.

* Home-accessories retailer Pier 1 Imports soared $1.24 to $19.10 after reporting it had earned 22 cents a share in the latest quarter, matching estimates.