Rally Takes Dow Back Above 11,000
Stocks roared back on Thursday, lifting the Dow index nearly 200 points, as fears about the economy eased after Federal Reserve Chairman Ben S. Bernanke sounded less strident about inflation risks.
Broader Wall Street indexes also zoomed, as did most major foreign markets.
Although analysts warned that stocks would have a hard time climbing back to their spring highs, many said they saw no reason to expect a further meltdown in the near term.
Investors, they said, were coming to an understanding about inflation, interest rates and the economy: The outlook on all counts wasn’t as good as it was five weeks ago, but it wasn’t all that bad either.
The selling wave in global markets since mid-May stemmed from “investors belatedly recognizing that inflation was moving higher,” said Abby Joseph Cohen, investment strategist at Goldman, Sachs & Co.
But now, she said, it’s clear the economy is slowing to a more sustainable growth rate, and the market again believes that the Fed won’t have to raise rates much more to subdue inflation.
After tumbling 936 points, or 8%, from May 10 through Tuesday, the Dow Jones industrial average rallied 110 points on Wednesday, then jumped 100 points in early trading Thursday.
Bernanke stoked another round of buying in the afternoon, after he told the Economic Club of Chicago that although the Fed was concerned about the effects high energy costs were having on prices, policymakers didn’t believe that inflation expectations were getting out of control.
“He’s telling us that we’re not in the explosive inflation environment of the 1970s,” said Ethan Harris, an economist at brokerage Lehman Bros. “There is a sense of relief that he’s not pounding the table” about inflation dangers.
The Dow ended near its high for the session, up 198.27 points, or 1.8%, to 11,015.19. It was the biggest one-day rally since April 21, 2005.
The Standard & Poor’s 500 index soared 26.12 points, or 2.1%, to 1,256.16, leaving it down 5.2% from its five-year high on May 5.
Bernanke had helped to fuel heavy selling in global markets on June 5, when he said that the rising trend of inflation was “unwelcome.” His tone boosted fears about how far the Fed would go in tightening credit to slow the economy and quash inflation.
Analysts said there was no question that the Fed would raise its benchmark short-term interest rate from 5% to 5.25% when policymakers meet June 29. But investors, they said, now were prepared for that, after taking share prices down sharply since mid-May.
That gave bargain hunters the courage to step up on Thursday, market pros said.
The technology-dominated Nasdaq composite index, which had plummeted 12.6% from April 19 through Tuesday, surged 58.15 points, or 2.8%, to 2,144.15, its biggest gain in more than two years.
The Russell 2,000 small-stock index rocketed 23.96 points, or 3.5%, to 701.05. It had been down 14% from May 5 through Tuesday.
Rising stocks outnumbered losers by more than 4 to 1 on the New York Stock Exchange and on Nasdaq, in heavy trading.
Technical factors helped drive the rally, some analysts said. Stocks had fallen so fast the last five weeks that a bounce was inevitable.
“It was a coiled spring,” said Jon Brorson, head of the growth-stock group at money manager Neuberger Berman Inc. in Chicago.
What’s more, the quarterly expiration this week of key stock index options and futures contracts has roiled markets as investors who use those contracts in trading strategies have closed or rolled over their bets.
But renewed optimism about economic growth underpinned the rebound, many analysts said. Before Bernanke spoke, the Fed’s Philadelphia and New York branches issued reports on manufacturing activity in their regions this month, and both pointed to continued expansion.
Investors can handle another notch higher in short-term interest rates if they’re confident that the economy will remain on track and that corporate earnings will continue to rise, said Peter Dunay, strategist at Leeb Index Group in New York.
But it isn’t clear how investors will react if inflation pressures fail to ebb and it appears the Fed will have to tighten credit further in the second half of the year, he said.
That’s what troubles Brorson as well. “I don’t think there’s going to be a recession,” he said. But through summer, “I think there’s going to be a great deal of confusion about the economy and what’s happening with inflation.”
Given the uncertainty, “we’re not looking to load up at all” on stocks, Brorson said.
Among Thursday’s market highlights:
* Foreign stock markets, many of which had fallen much more sharply than U.S. shares since mid-May on concerns about the global economy, posted big gains. Before U.S. trading opened, India’s stock market shot up nearly 7% after tumbling 29% since May 10. The Russian market jumped 5.5%.
Most European markets rose 2% or more, getting a late lift as U.S. stocks jumped at the opening. The final segment of European trading overlaps with the U.S. opening.
Mexico’s market index posted its biggest jump in six years, up 6.7% to 17,932.33.
* Commodity-related stocks led Wall Street’s rally. They had led the market down in recent weeks as investors worried that the Fed might kill the economic expansion with tighter credit. The manufacturing data from the New York and Philadelphia Fed branches helped to dissipate those fears.
U.S. Steel jumped $4.51 to $64. The stock hit a record high of $76.60 on May 10. Mining firm Rio Tinto shot up $13.44 to $204.94 and Marathon Oil leaped $3.06 to $74.83.
In futures trading, gold climbed $4.20 to $566.50 an ounce in New York. Oil futures added 36 cents to $69.50 a barrel.
* Renewed faith in the economy also lifted industrial stocks, including Boeing, up $2.80 to $84.81. Caterpillar was up $3.37 to $70.85 and Black & Decker jumped $3.32 to $84.
* In the tech sector, Hewlett-Packard rose $1.74 to $31.88, Broadcom gained $1.80 to $32.40 and Qualcomm added $1.64 to $44.89.
* Brokerage shares rebounded as investors grew more optimistic about the longevity of the bull market. Also, Bear Stearns said its fiscal second-quarter earnings soared 81%, sending its shares up $7.36 to $131.56. Merrill Lynch rose $2.44 to $67.85.
* For a second day, Treasury bonds suffered as some investors sold bonds to buy stocks. The yield on the 10-year T-note ended at 5.10%, up from 5.06% on Wednesday and near the four-year high of 5.20% reached May 12.
