Stock Prices Extend Rally as Oil Continues to Retreat
Stocks rose again Wednesday as oil prices extended their drop from record levels reached in the aftermath of Hurricane Katrina.
Investors also expected the economy to get a boost from the U.S. government’s rebuilding efforts along the Gulf Coast following the hurricane.
But the market’s gains were limited by a report showing slowing growth in labor productivity and rising wage costs, which renewed concerns about inflation and interest rates.
The Dow Jones industrial average was up 44.26 points, or 0.4%, at 10,633.50. The Standard & Poor’s 500 index was up 2.97 points, or 0.2%, at 1,236.36. The technology-laced Nasdaq composite was up 5.17 points, or 0.2%, at 2,172.03.
“It is an impressive showing for the market again,” said Michael Metz, chief investment strategist at Oppenheimer & Co.
“Hurricane Katrina seems to be put into the background. You are going to see the economy get some stimulus from federal spending,” he said.
Wall Street was encouraged when oil prices fell $1.59 a barrel to $64.37 as more Gulf Coast production facilities resumed operations and traders saw that Katrina’s damage to the petroleum infrastructure was less than initially feared.
Large-cap stocks also got a bounce after the Energy Information Administration, a division of the Department of Energy, said Wednesday morning that it saw U.S. retail gasoline prices falling to $2.58 a gallon in the fourth quarter. The administration also slashed its forecasts for growth in U.S. oil demand this year and next, saying higher costs would deter consumption.
Stocks moved in a narrow band, but trading was choppy as investors took in each piece of news and tried to parse the effects of Hurricane Katrina.
“To an extent, we’re all just groping in the dark to make sense of all the news, all the stories, all the data,” said Jack Caffrey, equity strategist at JPMorgan Private Bank, adding that much of the data from prior months had been made obsolete by last week. “What are the ripple effects? What will the costs be on a cost front, a delivery front and a psychology front?”
Bonds continued the previous session’s sell-off, with the yield on the 10-year Treasury note rising to 4.14% from 4.09% on Tuesday. Yields on bonds rise as their prices fall.
The stock market’s strong performance of late -- including a 141-point gain by the Dow on Tuesday -- is encouraging investors to shift money from bonds to stocks. Even so, the S&P; 500 and Nasdaq fell in morning trading after the Department of Labor revised second-quarter productivity growth down to a 1.8% annual rate, instead of the 2.2% in a preliminary report.
The department also reported that unit labor costs rose at a 2.5% annual rate in the second quarter, up from the 1.3% increase previously reported.
Higher wages are one of the indicators of inflation the Federal Reserve will weigh as it considers its interest rate policy. Traders had hoped the Fed would end its year-plus march of short-term interest rate hikes after Hurricane Katrina and softer economic data released last week, but increased wages could signal that rate hikes will continue.
A speech by Chicago Federal Reserve President Michael Moskow saying the Fed “will take appropriate monetary policies to keep inflation well contained” was also a blow to traders waiting for rate increases to end.
In other market highlights:
* Fast food chains saw their shares rise on a positive report from Bear Stearns analyst Joseph Buckley.
McDonald’s climbed $1.04 to $33.70 for the best performance in the Dow average. Buckley said the company’s U.S. sales would exceed expectations based on new products, expanded hours and effective advertising.
Yum Brands, the owner of KFC and Pizza Hut restaurants, jumped $2.91 to $50.66. Buckley lifted the stock to “outperform” from “peer-perform.” An S&P; 500 index of restaurants rose 2.6% after Buckley boosted his rating on the group to “market overweight” from “market weight.” Wendy’s International climbed $1.48 to $48.55.
* Hewlett-Packard rose 21 cents to $27.46 after UBS raised its recommendation on the world’s No. 1 printer maker to “buy” from “neutral,” saying cost cuts and “stable” prices for computers would boost earnings.
* Pfizer led a measure of healthcare shares up 0.7% after a Food and Drug Administration review found the company’s application for Exubera inhaled insulin “acceptable.” An advisory panel today will consider whether to recommend final approval to the agency.
Pfizer gained 43 cents to $26.30. Nektar Therapeutics, which is working with Pfizer on the treatment, climbed $1.81 to $19.14.
* McCormick sank $3.93 to $29.28 for the steepest drop in the S&P; 500. The spice maker reduced its fiscal 2005 per-share earnings forecast to $1.58 to $1.62, down from $1.66 to $1.70.
* Hibernia slid $1.54 to $29.86. Capital One Financial reduced the amount it would pay for Louisiana’s top bank by 7.6% to $5 billion after Katrina left a fifth of its branches in the affected area with “significant damage.” Capital One retreated $1.05 to $79.45.
* Altera fell $1.69 to $20.11 after the maker of programmable microchips cut its profit margin forecast.
