Stocks Surge in Broad Rally; Dow Up 4.5%
Stock prices rebounded sharply Monday as investors gobbled up shares following last week’s near-record sell-off, but it remained to be seen whether the recovery would prove lasting.
Key indexes reclaimed about one-third of last week’s losses after some experts declared that the week’s plunge was the sort of “climactic” sell-off that often marks the end of bear markets.
However, others cautioned that the economy and stock prices could remain weak for some time in the aftermath of the Sept. 11 terrorist assault.
After sinking more than 14% last week, the Dow Jones industrial average jumped 368.05 points, or 4.5%, to 8,603.86 Monday.
The Nasdaq composite index, which tumbled 16.1% last week, climbed 76.21 points, or 5.4%, to 1,499.40. The Standard & Poor’s 500 index rose 3.9% to 1,003.45.
Winners outnumbered losers by about 3 to 1 on Nasdaq and the New York Stock Exchange. Volume was heavy but below last week’s unprecedented levels on the NYSE.
Most major foreign stock markets also gained Monday, setting a better tone for Wall Street.
Investors dumped stocks with abandon last week as markets reopened after a four-day closure. The selling created a host of bargains for long-term investors, bulls argued.
Last week’s decline in the Dow was the worst since the index dropped 15.6% during one July week in 1933, amid the Great Depression.
On Monday buyers scooped up shares, as some bet on the idea that equity prices historically bottom out when investor sentiment is bleak and when there seems to be little good reason to be in the market.
“At bear-market bottoms there rarely seems to be any good reason for a [one-day] rise to be sustained,” said Hugh Johnson, chief investment officer at First Albany Corp. “If there is a reason for today’s [rally to continue], it’s that the stock market has become very undervalued. The trading last week was very symptomatic of a bear-market bottom.”
Not everyone was so sanguine. Given the magnitude of last week’s losses, many experts had predicted stocks would undergo a knee-jerk recovery early this week. But the market has a track record this year of failing to extend rallies.
The biggest threat to the market now is another terrorist assault, which almost certainly would exacerbate fears of personal security, experts say.
Beyond that, however, stock prices could be under pressure in coming months if companies continue to unleash a flood of earnings warnings and if economic data suggest the U.S. is falling into a deep recession.
The economy already was in questionable shape before Sept. 11, and few companies are expected to post positive news in the next few months.
Jim Paulsen, chief investment officer of Wells Capital Management, worries that a “daily litany of bad reports,” including layoff announcements and other grim economic news, could undermine any rally.
Indeed, several companies, including Federated Department Stores, issued earnings warnings Monday. The retailer’s stock rose $1.32 to $28.22, but it has crumbled from a peak of $49.90 in spring.
A Temporary Bottom?
The situation could resemble the period earlier this year when stock prices reached a temporary bottom in early April and rallied until late May. However, the market then began to sag under the weight of repeated bad news from corporate America.
The Nasdaq index fell to 1,638.80 on April 4, then rocketed 41% by late May before beginning to slide anew. It’s now down 39.3% year to date. The Dow is down 20.2% year to date.
As in spring, “It’s hard for me to see how we sustain a rally” this time, Paulsen said.
Still, Monday’s gains were broad-based. Shares of General Electric, which dropped more than 20% last week, rose 12.5% to $35.20. Intel jumped more than 10%, to $21.31.
Airline stocks, which have been pummeled ever since the terrorist attacks, moved modestly higher. UAL, parent of United Airlines, picked up 93 cents to $18.06. AMR, parent of American Airlines, rose 40 cents to $18.30, while Southwest added 15 cents to $13.75.
The Dow index was led higher by Honeywell, up $3.04 to $27.84; IBM, up $4.30 to $94.80; and 3M, up $4.69 to $91.67.
Among tech leaders, Cisco Systems added 47 cents to $12.56 and Sun Microsystems jumped 77 cents to $8.73.
Most retailers were strong despite Federated’s warning. Home Depot surged $2.90 to $36.01, Target jumped $3.47 to $30.15 and Kohl’s gained $3.03 to $47.91.
Analysts cautioned that some of Monday’s buying was by “short sellers” who had previously borrowed and sold stocks, betting they would slide. A market rally often spurs short sellers to close out their bets by buying shares to pay back their loans.
On the down side, energy stocks fell as crude oil and natural gas prices dived. In the oil-field services sector, Schlumberger lost $2.28 to $44.68 and Halliburton was off $1.38 to $21.20. Among international oil companies, Chevron was down $2.91 to $81.10, but Exxon Mobil gained 3 cents to $35.86.
In other markets, Treasury bond yields edged up as some investors moved money out of bonds and into stocks. The dollar strengthened against the yen and was little changed against the euro.
Monday’s stock gains were driven in part by bullish comments from Wall Street prognosticators such as Abby Joseph Cohen. The high-profile Goldman Sachs Group strategist recommended that investors transfer some money to stocks from bonds.
Bulls argue that the Federal Reserve’s eight interest-rate cuts this year, coupled with the attention to the economy being paid by Washington policymakers, will help to spur the economy some time next year.
They also say the market could rally if the U.S. soon launches military action against the Taliban government in Afghanistan. Retaliatory strikes could help Americans feel more physically secure, which in turn could boost bullish sentiment.
Many analysts agree that the direction of the market could be determined far more by military and political events than by traditional forces such as the movement of interest rates.
Military Progress May Boost Shares
Stocks could move up if it appears that U.S. forces are making progress in their fight against terrorism. But as during the latter part of the Vietnam War, the market could suffer if the fight appears likely to be prolonged or ineffectual.
“It’s all about George Bush. It’s not about Alan Greenspan,” said Peter Canelo, investment strategist at Morgan Stanley Dean Witter. “This isn’t about interest rates. This is about how the administration proceeds in a diplomatic, political or military front.”
Stock prices could swing wildly until there is a general consensus that America is winning the war on terrorism and that the U.S. itself is not vulnerable to a major attack, some analysts said.
“We have to get to that point where we feel we shall overcome,” said Tobias Levkovich, equity strategist at Salomon Smith Barney in New York.
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Bloomberg News was used in compiling this report.
Market Roundup: C10, C11
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GLOBAL REBOUND
Stock markets around the world rose Monday--the first broad rally since the Sept. 11 terrorist attacks.
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Country Index % chg. Monday Germany DAX +6.6% France CAC 40 +5.7 Mexico IPC +4.7 Britain FTSE 100 +4.1 United States S&P; 500 +3.9 Hong Kong Hang Seng +3.9 Korea Kospi 200 +2.3 Brazil Bovespa +1.1
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Note: Markets in Japan were closed for a holiday.
Source: Bloomberg News
