Stocks signal relief, hope
Stocks powered ahead Friday, lifting the Dow index to a three-month high on growing optimism that the worst of the credit crisis is past.
A $5.1-billion quarterly loss by Citigroup Inc. provided the unusual spark for a “relief” rally -- relief that the news from the world’s biggest bank wasn’t even worse and that it appeared to be addressing its problems aggressively.
Citigroup said it had written down $12 billion of bad investments, half of it mortgage-related, and would cut 9,000 more jobs.
“This is what investors want to hear,” Jefferies & Co. strategist Art Hogan said, referring to the write-downs. “We’re getting the sense that a lot of the worst case has been priced in,” or taken into account.
The Dow Jones industrial average gained 228.87 points, or 1.8%, to 12,849.36. It was the index’s fourth straight winning day and brought it to a three-month high. The Dow has risen 9% since March 10, although it remains down 9% from the record high it hit Oct. 9.
Hogan also credited recent actions by the Federal Reserve with easing a freeze-up in the credit markets. But he and other experts said it was too early to tell whether the central bank’s interest rate cuts and other efforts to pump money into the financial system would spur high inflation months from now.
“This is a nice day in the market, but I personally think it’s too early to call it a big turning point for the financials,” said Michael O’Rourke, strategist at BTIG in New York.
As often happens on Wall Street, Friday’s rally defied somber economic news. In California, for example, the unemployment rate for March shot up half a percentage point to 6.2%.
There is a consensus among economists that if the country is not currently in recession, it is close to it. Consumer spending -- the economy’s main driver -- is under pressure from high gasoline prices, falling home values and worries about jobs.
The economic malaise, among other things, caused some experts to doubt that the turnaround for stocks would have staying power.
“Maybe the big hit from sub-prime is behind us, but if we’re in the early part of a recession, things will get a lot worse,” said Robert Brusca, chief economist at Fact and Opinion Economics in New York. “I think it’s better to be skeptical about this rally than embrace it.”
A big factor in the rush back into stocks in recent weeks has simply been relief that the financial system didn’t implode under the weight of the mortgage debacle, analysts say.
After the near-collapse of brokerage Bear Stearns Cos. last month, the Fed took a gamble and opened its lending window wider, not just to banks but securities firms.
“The Fed has added liquidity to the financial system in amounts never seen before,” said Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co. in Nashville.
At the very least, that bought time for banks and brokerages to mend their balance sheets.
With fear of immediate cataclysm receding, investors have become more willing to take risks with their money in search of higher returns.
That shift in sentiment shows in the rebound of Treasury bond yields in recent weeks. Panicked investors had rushed into the relative safety of Treasury debt in the first quarter, driving the rate of interest paid to multiyear lows.
Now, some of those same investors are selling Treasury issues and using the proceeds to buy stocks and other riskier investments.
“It’s the unwind of the ‘flight to quality,’ ” said George Goncalves, chief Treasury bond strategist at Morgan Stanley in New York.
The annualized yield on the five-year Treasury note hit 2.9% on Friday, up from 2.2% in mid-March, which was the lowest level since 2003. Bond yields rise as their prices fall.
Friday’s stock market gains were also boosted by stronger-than-expected earnings reports from industrial firms Caterpillar Inc. and Honeywell International Inc., as well as from Internet behemoth Google Inc., which reported its results after the close of trading Thursday.
Google shares jumped almost $90, or 20%, leading the Nasdaq composite index to a 2.6% gain on the day. Citigroup, which trades on the New York Stock Exchange, was up 4.5%.
If investors are slightly bolder, they’re still jumpy. Several analysts noted the sharp reaction April 11, when market bellwether General Electric Co. pared its full-year earnings-growth forecast to about 5% from the double-digit advance that analysts had expected. GE shares plunged 13% and helped drag the Dow down 256 points.
In the financial-services sector, the forecasts are especially hedged. Richard Fuld, chief executive of Lehman Bros., told shareholders at the brokerage’s annual meeting Tuesday that “the worst is behind us” in the credit crisis, but also that the “current environment remains challenging.”
At Goldman Sachs’ annual meeting a few days earlier, CEO Lloyd Blankfein offered his own careful assessment: “We’re closer to the end than the beginning.”
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michael.hiltzik@latimes.com
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Times staff writer Tom Petruno contributed to this report.
