Stocks soar as Europeans agree to $1-trillion aid package
Two trading days after European debt woes set the stage for a heart-stopping plunge in U.S. stocks, a massive bailout package adopted across the Atlantic gave Wall Street its biggest one-day gain in more than a year.
The Dow Jones industrial average soared 404.71 points, or 3.9%, to 10,785.14 after European leaders announced a $1-trillion plan to help the fiscally troubled governments of Greece, Portugal and other countries — and to keep their woes from setting off another global financial crisis. The Standard & Poor’s 500 index surged 4.4%, while the Nasdaq composite index rocketed 4.8%.
Shares were up even more sharply in Europe, where key stock indexes jumped 14% in Spain, 11% in Italy, 9.1% in Greece and 5.3% in Germany.
The Dow’s advance was its biggest since the blue-chip index climbed 497 points in March 2009, two weeks after hitting a 12-year low.
After weeks of indecision in European capitals, the bailout plan was more substantial than many expected.
“This is huge,” said Steven Ricchiuto, chief economist at Mizuho Securities in New York. “It’s a big program, it’s substantive, it’s unexpected.”
Still, the major U.S. indexes on Monday erased only about half of their losses from the preceding four sessions, including Thursday, when the Dow briefly was down nearly 1,000 points. Although the precise trigger of that steep intraday slide remains mysterious, it was fear of fallout from Europe’s problems that drove the four-day decline.
The core of the bailout program calls for a number of European countries and the International European Fund to guarantee new loans taken out by struggling governments. In addition, the European Central Bank agreed to purchase large amounts of government bonds.
“Instead of them being grossly behind the curve as they were last week, this actually puts them a bit ahead of the curve,” said Sam Stovall, chief investment strategist at Standard & Poor’s Corp.
American financial institutions had been hard hit by the concerns about whether European governments would pay back their loans. On Monday, bank stocks in the S&P 500 jumped 5.6% on average, more than any other broad industry group except for industrial companies.
But it’s unclear how the program will work in practice, and economists expressed doubt about whether Greece and Portugal would curb their spending and how willing France and Germany will be to actually put up the money they have promised.
“It’s a substantial improvement in what we had seen,” said A.C. Moore, the chief investment strategist for Dunvegan Associates Inc. in Santa Barbara. “But the real test is down the road. In the end you have to produce more than you consume for the currency to have any value.”
In the currency market, the euro, which had been steadily losing ground against the dollar, rebounded on the news, but fell back from its high point of the day amid skepticism about the bailout plan’s ability to buttress the European economy or its single currency. The 16-nation currency ended the New York trading day at $1.28, only about a penny higher than its market value late Friday.
The Dow is now up 64% from its low in March 2009. During that time, it hasn’t experienced a 10% decline — the definition of a market “correction.” The S&P 500 has also avoided a correction, although the more volatile Nasdaq entered correction territory last week, closing Friday down 10.4% from its April 23 high. With Monday’s advance the tech-dominated Nasdaq is down only 6.1% from that late-April peak — and up 87% from its bear-market low 14 months ago.
Monday’s rally also put the major U.S. indexes up, year to date, after they briefly fell into negative territory late last week. Their counterparts in Europe, meanwhile, are mostly down for the year.
The European actions unveiled Monday could allow American investors to focus once more on U.S. economic indicators, which have consistently flashed “recovery.”
“We’re pretty convinced that we have an entrenched upturn — and when the dust settles it will continue to be that way,” said Allen Sinai, president of Decision Economics in New York.
