By Caroline Valetkevitch
NEW YORK (Reuters) - U.S. stocks staged an explosive rally on Wednesday, driving the Dow and the S&P 500 to all-time closing highs after the Federal Reserve announced it would start to unwind its historic stimulus.
While the Fed's move came as a surprise to many in the market, it confirmed that the U.S. economy was on firmer footing and put to rest the question of when the Fed would begin to scale back its bond-buying program, a relief to some investors, analysts said.
"This is a vote of confidence in the economy and represents the first step toward monetary policy normalization," said David Joy, chief market strategist at Ameriprise Financial, in Boston.
The central bank said it would reduce its monthly asset purchases by $10 billion to $75 billion, while it also indicated that its key interest rate would stay at rock bottom even longer than previously promised. It said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the U.S. jobless rate falls below 6.5 percent.
Yet the decision to move now rather than later pointed to better prospects for the U.S. economy and the labor market. It also marked a turning point for the largest monetary policy experiment ever.
Stocks extended losses just after the announcement, but quickly turned higher and began rallying. The day's move marked the biggest swing from the day's high to the low for the S&P 500 in two years. All 10 S&P 500 sector indexes ended higher, with all but information technology gaining more than 1 percent, and the S&P 500 financial index rising 2.4 percent.
The Dow Jones industrial average surged 292.71 points or 1.84 percent, to end at 16,167.97, a record closing high. The S&P 500 gained 29.65 points or 1.66 percent, to finish at 1,810.65, also a record closing high. The Nasdaq Composite climbed 46.384 points or 1.15 percent, to close at 4,070.064.
Fed Chairman Ben Bernanke began hinting at a reduction in the stimulus back in May. The issue of when the Fed would make its move had been a source of uncertainty for markets since then. The Fed surprised markets three months ago by choosing not to reduce its third round of quantitative easing.
Most surveys had forecast the move would occur after December, but recent strong economic data seemed to suggest that the timeline could be pushed up.
"Janet Yellen's imprint is on this move, and that's very good for the markets," said Quincy Krosby, market strategist at Prudential Financial, in Newark, New Jersey, in reference to the Fed's vice chair and President Barack Obama's nominee to succeed Bernanke in the Fed's top job. "It's clear from moves in bonds and equities that the markets discounted this in September."
The CBOE Volatility Index or VIX, Wall Street's barometer of anxiety, slid 14.9 percent to end at 13.80.
Energy companies' stocks helped lead both the Dow and the S&P 500 higher as oil prices gained. Shares of Exxon Mobil XOM.N> gained 2.9 percent to close at $99.54, after hitting an all-time intraday high of $99.95.
Shares of Lennar Corp jumped 6.3 percent to $37.43 after the No. 3 U.S. homebuilder reported a 32 percent jump in fourth-quarter profit.Data on Wednesday showed that U.S. housing starts surged to the highest in nearly six years in November, a sign of strength in the housing market.
Tech underperformed the broader market, with shares of Jabil Circuit Inc tumbling 20.5 percent to $15.67 a day after it forecast current-quarter results way below Wall Street's estimates. The outlook weighed on other companies in the technology space, including Apple Inc , which slipped 0.8 percent to $550.77.
Shares of Ford Motor Co dropped 6.3 percent to $15.65 after the No. 2 U.S. automaker warned on Wednesday that the cost of launching new vehicles and a deteriorating Venezuelan economy would take a bite out of its 2014 pretax profit.
Volume was well above average for the month. About 8.1 billion shares changed hands on U.S. exchanges, above the 6.1 billion average so far this month, according to data from BATS Global Markets.
Advancers outnumbered decliners on the New York Stock Exchange by a ratio of about 4 to 1. On the Nasdaq, about 18 stocks rose for every seven that fell.
(Additional reporting by Herbert Lash and Steven Johnson; Editing by Nick Zieminski and Jan Paschal)