Stocks Stage Rally to End the Quarter
Wall Street ended the month with a modest rally Friday, adding to what were surprisingly strong gains for many stocks in a third quarter racked by rising interest rates, record energy prices and doubts about the U.S. economy.
The Dow Jones industrial average, which edged up 15.92 points, or 0.2%, to 10,568.70 on Friday, rose 2.9% for the quarter after losing ground in the first half of the year.
Broader market indexes outpaced the Dow in the last three months. The Standard & Poor’s 500 index, at 1,228.81 on Friday, was up 3.2% for the quarter; the technology-heavy Nasdaq composite, at 2,151.69, gained 4.6% in the period.
Although U.S. stocks advanced in the quarter, they mostly trailed their foreign rivals. The bull market was in robust form overseas: A Bloomberg News index of 500 European blue-chip shares surged 7.7% in euro terms in the three months; Japan’s Nikkei 225 soared 17.2% in yen terms; Russia’s benchmark indexes were up 30% or more in rubles.
Analysts say the common themes overseas were optimism about the global economy and about corporate earnings. Those same sentiments should help U.S. stocks catch up in the fourth quarter, market bulls say.
“Equities ultimately follow the direction of corporate earnings, which are still heading higher,” said Tony Dwyer, a strategist at FTN Midwest Securities in New York. With U.S. stocks overall struggling this year even as earnings have risen, “I think the market has become extremely attractive no matter what [measure] you use.”
Despite the leap in energy prices in the quarter -- they were rising sharply even before hurricanes Katrina and Rita struck the Gulf Coast -- analysts remain upbeat about third-quarter profit growth as many companies bolster their bottom lines through cost cutting and other means.
Operating earnings of the S&P; 500 companies are expected to be up 18% in the quarter from a year earlier, helped in part by energy companies’ outsized profits, according to research firm Thomson Financial. But even excluding energy firms, earnings for the rest of the S&P; companies are expected to rise 12%, on average.
A report Friday on Chicago manufacturing activity supported the view of analysts who say the economy isn’t likely to suffer significantly because of the hurricanes: The National Assn. of Purchasing Management-Chicago said its regional manufacturing index rose to 60.5 this month from 49.2 in August. Any reading above 50 indicates economic expansion.
A September survey of 81 large money managers by Russell Investment Group found that just 11% expected oil prices to have a “significant negative impact” on stocks in the next six months. The majority -- 67% -- said oil would have a “modest negative impact.”
Oil slipped 55 cents a barrel to $66.24 on Friday but was up $9.74, or 17.2%, for the quarter. The record high was $69.81 set Aug. 30.
Still, with gasoline averaging close to $2.80 a gallon at the pump, the outlook for consumer spending remains a serious concern on Wall Street.
Although most major market indexes rose in the third quarter, many consumer-related shares were weak. An S&P; index of department store stocks slid 9.5% in the period.
Doug Sandler, a strategist at Wachovia Securities in Richmond, Va., this week advised clients to pare their positions in stocks such as retailer Home Depot, builder Pulte Homes and toy maker Mattel, on fears that consumers could become less willing or able to spend.
Besides the squeeze that high energy prices are putting on Americans’ wallets, the Federal Reserve continues to raise short-term interest rates -- and shows no sign of wanting to halt its credit-tightening campaign.
Immediately after Katrina hit, some economists predicted the Fed would go on hold. Instead, policymakers on Sept. 20 raised their benchmark rate from 3.5% to 3.75%, a four-year high.
Treasury bond yields plunged after Katrina but have been rising steadily over the last three weeks. On Friday the 10-year T-note, a benchmark for mortgages, ended the quarter at 4.33%, up from 4.3% on Thursday and 3.92% on June 30.
The two-year T-note yield, which is particularly sensitive to expectations for Fed rate hikes, ended at a four-year high of 4.16% on Friday, up from 4.13% on Thursday and 3.64% on June 30.
Some money managers are betting that the Fed’s rate-boosting program won’t kill the bull market but will change its leader board in the next year.
James Awad at Awad Asset Management in New York specializes in shares of higher-quality small firms. His stocks have lagged this year, he said, because many investors are favoring riskier small-company issues, hoping to make a fast buck.
Historically, equity investors turn more conservative as interest rates rise, Awad said. “The environment is coming our way,” he said. “It’s just a question of how quickly.”
Smaller stocks as a whole still beat blue-chip shares in the third quarter, continuing a trend that began in 2000. The Russell 2,000 index of smaller issues rose 4.4% in the three months and is up 2.5% year to date.
By contrast, the Dow industrials are down 2% this year, the Nasdaq composite is down 1.1% and the S&P; 500 is up 1.4%, not counting dividend income.
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Up quarter
Most major U.S. stock indexes rose in the third quarter,
but some still are in the red year to date.
*--* Index 3rd qtr. YTD NYSE energy +17.6% +36.8% Dow utilities +11.8 +29.1 Dow transports +7.2 -1.5 NYSE composite +5.8 +5.3 S&P; small-cap +5.1 +6.5 Nasdaq composite +4.6 -1.1 S&P; mid-cap +4.6 +8.0 S&P; 500 +3.2 +1.4 Dow industrials +2.9 -2.0 Bloomberg REITs +2.2 +6.2
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Returns don’t include dividends.
Source: Bloomberg News
