Stocks Finish with Strong Gains

Major equity indexes climbed over 2% Thursday in tandem with a rally in Treasuries. Bernanke testified on the BofA-Merrill deal

U.S. stocks finished sharply higher Thursday, with major indexes posting gains of over 2%. Equities climbed in step with a rally in the Treasury market, where a 7-year note auction drew strong investor demand, pressuring yields.

Program trading and end-of-quarter portfolio adjusting helped lift major indexes, according to S&P MarketScope.

Traders also weighed some mixed economic data. The government revised first-quarter GDP upward to -5.5% from its -5.7% preliminary reading. The Labor Dept. reported that initial jobless claims rose 15,000 to 627,000 in week ended June. 20 and continuing claims rose 29,000 to 6,738,000.

In congressional testimony Thursday, Federal Reserve Chairman Ben Bernanke defended the Fed's actions in the merger of Bank of America (BAC) and Merrill Lynch .

On Thursday, the 30-stock Dow Jones industrial average ended higher by 172.54 points, or 2.08%, at 8,472.40. The broad Standard & Poor's 500-stock index gained 19.32 points, or 2.14%, to 920.26. The tech-heavy Nasdaq composite index added 37.20 points, or 2.08%, to 1,829.54.

On the New York Stock Exchange, 25 stocks were higher in price for every six that declined. Breadth on the Nasdaq was 22-5 positive.

Homebuilders, retailers, and other consumer discretionary stocks were bolstered by encouraging reports from Lennar (LEN) and Bed Bath & Beyond (BBBY).

The dollar index ended lower. Gold and crude oil futures moved higher, sparking gains in stocks of commodities outfits.

In testimony before a House panel Thursday, the Fed chief again denied playing a role in BofA's take-over of Merrill, and insisted the Fed acted with the "highest integrity," which ultimately strengthened both companies. He did acknowledge that he had concerns about BofA's talk about invoking the MAC clause, and believed annulment of the deal posed risks to the financial system. Most of the testimony outlined background details, as well as discussions on the merger.

Earlier this month, BofA president Ken Lewis said his job was threatened after he expressed second thoughts about the merger. Lewis said then-Treasury Secretary Henry Paulson and federal regulators made clear that if the Charlotte, N.C.-based bank reneged on its promise, that he and the bank's board members would be ousted. Bank of America received $45 billion from the government's financial bailout program, $20 billion of which was linked to its acquisition of New York-based Merrill Lynch.

"If the reaction in the markets is any judge, then the Fed chief held his own against a contentious congressional committee," says Action Economics.

The federal government agreed to accept $25 billion of preferred stock in two American International Group (AIG) businesses as partial repayment of debt, the company said. Reuters reported the agreement will reduce AIG's debt of about $40 billion under a Federal Reserve Bank of New York credit facility, but it will still be a while before taxpayers get any cash back for their bailout of the insurer.

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