Stocks Rise in Broad Rebound
Stocks rallied broadly Wednesday on favorable economic and corporate earnings news, bringing some major market indicators nearly back to where they stood a month ago, on the eve of the Sept. 11 terrorist attacks.
Some Wall Street analysts said the market has rebounded faster than is warranted by a weak U.S. economy, dismal corporate earnings and a war-clouded geopolitical climate. But others argued that the rally was a logical response to efforts in Washington to jump-start the U.S. economy.
Wednesday’s rally was traced in part to a morning report by the U.S. Commerce Department that wholesale inventories had dropped for a third straight month in August, clearing the way for a possible increase in factory production.
The market also reacted positively to reports from the United States and its allies about the success of bombing strikes against targets in Afghanistan.
The Nasdaq composite index gained 56.07 points, or 3.6%, to 1,626.26, led by big technology names such as Qualcomm, up $4.05 to $44.90; Intel, up $1.61 to $23.06; and Microsoft, which gained 95 cents to $55.51 after falling 6% on Tuesday. It was the sixth gain in the last seven days of trading for Nasdaq.
The Dow Jones industrial average gained 188.42 points, or 2.1%, to 9,240.86, paced by 3M, up $3.40 to $101.84; Home Depot, up $2.31 to $40.21; and General Motors, up $2.15 to $42.96.
The Standard & Poor’s 500-stock index rose 24.24 points, or 2.3%, to 1,080.99, just 1.1% below its close of 1,092.54 on Sept. 10. The Dow’s post-attack loss has shrunk to 3.8% and Nasdaq’s to 4.1%. All three suffered double-digit declines in the first week of trading after the attacks.
Winners outnumbered losers by more than 2 to 1 on both Nasdaq and the New York Stock Exchange amid heavy trading.
The rebound in the major stock indexes and the recent strong moves by some leading tech stocks brought out the bull in some analysts.
“Crises tend to mark [market] bottoms,” said investment strategist Dirk Van Dijk, of Dean Investment Associates in Dayton, Ohio.
A “tidal wave of liquidity” created by the Federal Reserve Board’s nine interest-rate cuts this year plus the federal tax rebates and the emergency economic rescue package moving through Congress should get the economy growing again in a few months, and the stock market will move with it, Van Dijk said.
“If the real economy can absorb [all the liquidity], it’ll go into the stock market,” causing stocks to rebound even more sharply, he said.
Markets across Europe posted impressive gains Wednesday, with Germany’s DAX index up 3.2% and France’s CAC 40 index rising 3.4%.
With stocks rallying, investors moved away from Treasury securities, causing yields to rise, especially among shorter-term notes. There is also concern among some investors in the Treasury market that prices, which move in the opposite direction from yields, will fall in the face of a flood of new debt issuance to help finance the economic recovery package and the war effort. The yield on the two-year Treasury note rose to 2.75% from 2.73% on Tuesday.
On the U.S. earnings front, PepsiCo cheered analysts by saying that the terrorist attacks haven’t affected its domestic business and that it was comfortable with Wall Street’s earnings estimates for the current quarter despite the global economic downturn. Pepsi shares gained 96 cents to $49.89.
Motorcycle maker Harley-Davidson leaped $5.08 to $47.67, after reporting a 35% gain in third-quarter profit, beating analysts’ forecasts.
Insurance stocks also rose broadly, aided by comments from industry leader American International Group, which said it may push through price increases for some policies in the wake of the World Trade Center disaster.
The hope of price increases has outweighed the fear of losses from the terrorist attacks. After plunging 11% in the first week of trading after the attacks, the S&P; index of 20 insurance stocks has since rebounded 17%. AIG rose $3.35 to $80.70 on Wednesday.
Semiconductor stocks also rose broadly on speculation that if the economy is indeed on the mend, computer chip makers will be among the early beneficiaries. The Philadelphia semiconductor index rose almost 7%, with all 16 of its members gaining.
Not everyone is convinced the current rally has staying power, however. Tom Van Leuven, U.S. equity strategist for J.P. Morgan Securities in New York, was skeptical of the stock-market rebound, which he said was “unsupported by earnings fundamentals.”
J.P. Morgan’s economists believe that U.S. economic growth turned negative in the third quarter and will continue to shrink through the first quarter of next year. A recession is typically defined as two or more consecutive quarters of negative economic growth.
“Even if the economy does come back in the middle of next year, that doesn’t mean there will be blowout corporate earnings,” Van Leuven said, noting that profits tend to lag behind the economic rebound.
The recent recovery in stocks is a reaction “to hopes but not actual events,” he said.
Anthony F. Dwyer, chief market strategist of Kirlin Securities in New York, said that traders hoping for short-term profits could be burned by the volatility of this market. However, like Van Dijk, he expects the stimulus from lower interest rates and government spending to eventually boost the economy and the market.
“It always works, even though nobody believes it when you’re in the throes of the recession,” he said.
