Rising Hopes Worldwide Lift Markets
Stocks zoomed worldwide Monday as more investors bet on an economic revival in the second half of the year.
The rally began in Asia, spread to Europe, then powered Wall Street higher.
The technology-dominated Nasdaq composite index, which has led global markets’ advance this year, jumped 57.25 points, or 3.4%, to 1,720.71, a 14-month high. It was the biggest gain since April 2.
The Dow Jones industrial average rose 146.58 points, or 1.6%, to 9,216.79, and the broader Standard & Poor’s 500 index was up 18.72 points, or 1.9%, to 1,004.42.
Rising stocks outnumbered losers by more than 2 to 1 on the New York Stock Exchange and Nasdaq in active trading.
The driving force behind markets’ surge remains the expectation that business activity will pick up this year, underpinning corporate earnings, analysts say.
That faith was reinforced by a survey reported Monday by the Conference Board in New York, which said 65% of 100 chief executives it surveyed were optimistic about higher earnings.
What’s more, rising hopes for faster growth are triggering some big investors to sell bonds on the fear that long-term interest rates will continue to climb this year, devaluing older fixed-rate bonds, analysts say.
That selling is making higher yields a self-fulfilling prophecy: On Monday, the yield on the benchmark 10-year Treasury note rose to an eight-week high of 3.73%, up from 3.65% late last week.
As money exits the bond market, there are few options for many investors other than stocks, said Doug Sandler, chief equity strategist at Wachovia Securities in Richmond, Va. Yields on “cash” accounts such as money market funds are at record lows, under 1%, he noted.
“Bonds look lousy, cash looks lousy, and stocks look great” by comparison, he said.
The same issue is facing investors in Japan and Europe. In Japan, long-term government bond yields have rocketed in recent weeks from 0.45% to 1.10% as of Monday, boosted by some encouraging economic data.
As Japanese yields have soared, the Nikkei-225 stock index has rallied 9.8% since June 12, including its rise of 247.43 points, or 2.6%, to 9,795.16 on Monday.
Early today, the Nikkei index traded above the 10,000 mark for the first time since August.
On Wall Street, many investors remain nervous about the sharp gains in share prices this year, fearing that the market is becoming frothy -- recalling the heady days of the late-1990s bull market.
“The stock market has come so far, so fast that it instinctively scares me,” said Hugh Johnson, chief investment officer at brokerage First Albany Corp. in New York.
“Most of us started the year, pretty optimistically, figuring on high single-digit returns. No one predicted this kind of strength.”
The Nasdaq index is up 28.8% this year, the Dow is up 10.5%, and the S&P; 500 is up 14.2%.
Even as stocks rallied Monday, a number of well-known U.S. companies warned that their earnings will fall short of expectations in the near term.
Drug giant Schering-Plough, for example, said second-quarter earnings would be less than expected because of reduced U.S. sales and profit from its allergy drug Claritin, which is facing heavy generic competition. The stock lost 72 cents to $18.34 on the New York Stock Exchange.
Also warning about weaker earnings was fast-food chain Wendy’s International, which said higher taxes in some states would crimp its results in the near term. But the company’s stock still rose for the day, gaining 9 cents to $29.58 on the NYSE.
On the plus side, Frontier Airlines jumped $1.68 to $11.48 after saying second-quarter earnings should be better than expected.
Market bulls say that, even if many companies’ results are sub par in the second quarter, investors will continue to push into stocks on a bet that results will be better in 2004.
The market often is looking six months ahead in judging companies’ prospects, which means investors have begun to look at next year, and are betting that the combination of low short-term interest rates and tax cuts will make for a stronger economy, bulls say.
For individual investors, yields on certificates of deposit and money market accounts are now so low that even a 1% or 2% stock dividend yield looks generous, said Phylis Esposito, chief strategy officer at brokerage Ameritrade in Omaha, Neb.
The average annualized dividend yield of stocks in the S&P; 500 index is 1.6%.
Investors have been sitting on large stockpiles of cash, waiting for an opportunity to jump back into the market, Esposito added. The modest pullback in many shares over the last three weeks may have attracted buyers after the long holiday weekend, some analysts said.
The Dow fell from a peak of 9,323.02 on June 17 to 9,070.21 as of Thursday, a 2.7% dip.
“Any time you have a little pullback you see people jump right back in,” said Richard Nash, chief market strategist at Victory Capital Management in Cleveland.
In the contrary ways of Wall Street, another factor helping to fuel stocks is that many investors remain dubious about the rally’s longevity. That means stocks are climbing the proverbial wall of worry, analysts say.
“I probably talk to more skeptics than pure optimists” about the market’s potential, Nash said.
Count fund manager Christopher Orndorff at Los Angeles money management firm Payden & Rygel among the skeptics.
“I still stick to my thoughts that the market will return a high single-digit return this year,” he said. “I do not believe that we are at the beginning of a great bull market. I think we are just in a normal trading range, and now we are near the upper end of that range.”
On the other hand, the market is benefiting from “the law of low numbers,” First Albany’s Johnson said.
Because stock prices fell so far over the last three years, they may be able to rebound dramatically without signaling another bubble, he said. The three years after the 1929-32 stock market crash saw the Dow rise 140%, he noted, as the economy began to recover.
Among Monday’s highlights:
* European markets posted big gains, led by the French market, which rose 3.6%. But it is up 3.9% year to date, lagging the U.S. market.
* Semiconductor stocks led the advance in the tech sector. The SOX index of major chip stocks soared 7.2%. Intel rose $1.18 to $22.91, Texas Instruments was up $1.14 to $18.89 and Broadcom surged $1.99 to $28.55.
* In the Internet sector, Websense rose 81 cents to $15.62 in regular trading, then jumped to $18.50 in extended trading, after the maker of Net-monitoring software said second-quarter earnings would beat estimates.
The Interactive Week index of Net shares jumped 4.2% and is up 45% this year.
* Many drug stocks rose despite Schering’s warning. Merck was up 75 cents to $61.89 and Eli Lilly gained $1.06 to $70.33.
* In the airline sector, Southwest rose 59 cents to $17.73 and AMR, parent of American, was up 46 cents to $10.59.
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Global gains
Stocks soared Monday in most major markets worldwide. A sampling:
*--* % gain % gain Market/index Mon YTD France/CAC +3.6% +3.9% U.S./Nasdaq +3.4 +28.8 Taiwan/weighted +3.3 +19.5 Germany/DAX +2.9 +15.2 Hong Kong/H. Seng +2.7 +6.1 Japan/Nikkei +2.6 +14.2 U.S./S&P; 500 +1.9 +14.2 U.S./Dow 30 +1.6 +10.1 S. Korea/composite +1.6 +12.2 Britain/FTSE-100 +1.3 +3.4 Mexico/IPC +1.0 +17.8
*--*
Changes are measured in local currencies.
Source: Bloomberg News
