Stocks rally sharply at end of a gloomy quarter

NEW YORK — Wall Street finished the last trading day of the second quarter with a big rally as investors turned more optimistic about Europe containing its debt crisis.

Stocks finished sharply higher after Eurozone leaders agreed Friday to a plan that would bail out banks and provide more oversight for the troubled financial sector. It was a welcome relief for investors hammered during a quarter in which the Dow Jones industrial average and Standard & Poor’s 500 index both slumped more than 2%.

Investors were on guard during the last three months as concerns about Greece exiting the Eurozone and the health of the continent’s banking system roiled global financial markets. Friday’s plan to bulletproof European banks considerably lowered investors’ anxiety. But, analysts say, leaders are a long way from fixing the continent’s debt crisis.

And there are lingering concerns about the United States economy.


“There’s uncertainty out there,” said Larry Palmer, managing director at Morgan Stanley Private Wealth Management in Los Angeles. “There’s lack of confidence out there, and fundamentals generally are turning negative.”

European stock indexes were punished with double-digit percentage losses during the quarter, while the Dow fell 2.5%, the S&P 500 slid 3.3% and the technology-heavy Nasdaq composite dropped 5.1%.

Traders attributed the losses mostly to fears that Greece would drop the euro and that the political and financial turmoil would ricochet through Europe. A disorderly Greek exit from the Eurozone could have led to runs on Spanish and Italian banks, then spread the financial contagion across the Atlantic to U.S. banks.

Paul Zemsky, global head of asset allocation at ING Investment Management, believes that a Greek exit could take a dramatic toll on global stock markets. He estimated that it could lead to losses of between 10% and 20% in the S&P 500.


“The only thing we have right now is hope. There’s no policy on the table. People are just hoping we’ll get something out of the Europeans,” Zemsky said earlier this week. “The alternative is just too horrific.”

Stocks staged a big recovery Friday, with nearly $600 billion rushing into the market. The Dow rose 2.2% to 12,880.09, the S&P 500 jumped 2.5% to 1,362.16 and the Nasdaq climbed 3% to 2,935.05.

In the coming quarter, investors will also focus on other issues. Chief among them is whether U.S. spending cuts will go into effect and payroll- and income-tax cuts will expire at the end of the year, possibly pushing the economy off a “fiscal cliff.”

There also appears to be very little improvement in the economy.

The Commerce Department reported Friday that consumer spending showed no gain in May, the weakest figure since spending was unchanged in November. Incomes edged up 0.2%, matching the modest April increase.

Investors will get another glimpse into the economy next Friday when the government releases its jobs report. It is expected to show a fourth straight month of anemic job growth.

“Given where we are and the head winds against us economically and politically ... then we’re probably in for more of the same, and maybe even lower prices on equities,” Morgan Stanley’s Palmer said.


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