Manufacturing Report Rallies Stock Market

By Thomas S. Mulligan

Jan. 3, 2003 12 AM PT

Times Staff Writer

NEW YORK —

An industry report showing unexpected strength in manufacturing was all the excuse Wall Street needed Thursday to kick off the new year with a sharp rally.

Major U.S. stock indexes climbed more than 3%, following big rallies in European markets. The German DAX index jumped 7.3%, and the French CAC-40 index rose 4.3%.

The Treasury bond market, meanwhile, suffered its worst day in more than a year as the manufacturing report caused investors to discount the chances of a Federal Reserve interest rate cut this month.

For stocks, it was the biggest rally on the year’s first trading day since 1988 -- a year that saw the Standard & Poor’s 500 index gain 12.4%.

But some stock market observers were cautious about drawing any major conclusions from Thursday’s surge.

For one thing, they said, trading volume was nothing special. In addition, some of the buying may have been less an expression of bullishness than a reversal of some year-end selling for tax reasons.

“It’s not the first time people came into the new year expecting to see last year’s declines reversed,” said Christopher Low, chief economist at FTN Financial. “I’d like to see it last for a few days before I’d bet on it.”

Skepticism comes easy for a market that has just finished its third straight year of losses. The S&P; 500 fell 23.4% in 2002, ending with its worst December performance since 1931.

Still, Thursday’s gains were impressive. The Dow Jones industrial average rose 265.89 points, or 3.2%, to 8,607.52, as all but one of its blue-chip components posted gains. Philip Morris, the lone laggard, dropped 18 cents to $40.35.

One big winner was banking giant J.P. Morgan, which gained $1.44 to $25.44 on the Big Board after announcing a settlement with insurers under which it will collect 60% of its $1.1 billion in losses on energy trades that went sour in the Enron bankruptcy. The news lifted the whole financial-services sector.

The broader S&P; 500 added 29.21 points, or 3.3%, to 909.03, for its best one-day showing since Oct. 15. The Nasdaq composite index gained 49.34 points, or 3.7%, led by such big technology names as Microsoft, up $2.02 to $53.72; Intel, up $1.12 to $16.69; and Cisco Systems, up 54 cents to $13.64.

Winners outnumbered losers by more than 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq.

Driving the rally was a report that the Institute for Supply Management’s manufacturing index in December recorded its largest monthly jump in 11 years. “That totally blew past the economists’ estimates,” said Joseph S. Kalinowski, chief investment officer at Ehrenkrantz King Nussbaum.

The index climbed to 54.7 in December, exceeding 50 for the first time since August and increasing from 49.2 in November. Any reading above 50 indicates an expanding economy.

The strong manufacturing report, in fact, was more than enough to overcome some less-than-stellar news on the employment front. States received 403,000 new claims for unemployment benefits, up from a revised 390,000 a week earlier, the Labor Department said Thursday. The four-week moving average of jobless claims, which smooths out weekly volatility in the number, jumped to 418,750, the highest mark in three months.

Still, it was the manufacturing index that took center stage, giving market participants “a fresh burst of optimism” that the economy may be gaining steam after months of lackluster performance, Kalinowski said.

The effect on the bond market was sudden and violent. Treasury securities rallied last month in part on the perception that the economy was so sluggish there was a chance of another Fed rate cut even before its regularly scheduled meeting Jan. 28, FTN’s Low said.

The unexpectedly strong manufacturing report exploded that idea and sent bond prices tumbling and yields soaring. The yield on the benchmark 10-year note, which moves in the opposite direction of its price, leaped to 4.03% from its New Year’s Eve close of 3.82%.

The dollar, which slumped in December on war worries and concerns about the U.S. economy, rose more than 1% against major currencies Thursday. The euro closed in New York trading at $1.04, down from $1.05 Tuesday. The dollar closed at 119.94 yen, up from 118.74.

Even stock market bulls concede that the economy -- and corporate profits -- must get on a firmer footing before there is much chance of a sustained rally.

“Profits are the key to this whole game,” said David M. Blitzer, chief investment strategist at Standard & Poor’s. “I don’t see this market as tremendously undervalued, so it can’t really get going until the profits start coming through.”

As if to underscore that concern, Dow member Home Depot said after the closing bell that it was cutting its profit forecast for the current fiscal year. The stock, which closed up 86 cents at $24.88, fell more than $2 in after-hours trading.

An additional dampening factor is the threat of war.

Kalinowski, unlike Blitzer, thinks he could make a good case for the market being undervalued, but he said investor sentiment is “terrible.”

A key event, he said, may be the report to the United Nations this month by arms inspector Hans Blix, who is charged with determining whether Iraq is building weapons of mass destruction. By then, Kalinowski said, investors should have a clearer picture of whether the United States will invade Iraq.

“Whether it’s war or peace, at least the uncertainty will be over,” he said.

(BEGIN TEXT OF INFOBOX)

Happy new year

An upbeat manufacturing report boosted stocks in the U.S. and elsewhere on the first trading day of 2003.

Country/Index and % change Thursday

Germany/DAX: +7.3%

France/CAC: +4.3

Spain/IBEX: +4.1

Italy/MIB-30: +3.9

U.S./Nasdaq: +3.7

U.S./S&P; 500: +3.3

Brazil/Bovespa: +3.0