Bloomberg News

U.S. Stocks Rise on Speculation About Progress on Europe Crisis

October 06, 2011

Oct. 6 (Bloomberg) -- U.S. stocks rallied, giving the Standard & Poor’s 500 Index its biggest three-day gain since August, amid speculation that European officials were making progress in containing the region’s debt crisis.

Financial stocks in the S&P 500 added 3.2 percent as a group, rising 8.8 percent in three days, the biggest advance since July 2009, as European lenders gained and Treasury Secretary Timothy F. Geithner said U.S. banks have strengthened. Alcoa Inc., the largest U.S. aluminum producer, climbed 5.4 percent as commodities jumped. Target Corp. added 4.3 percent as September sales beat analysts’ estimates.

The S&P 500 rallied 1.8 percent to 1,164.97 at 4 p.m. New York time, climbing 6 percent in three days, the most since Aug. 15. The Dow Jones Industrial Average gained 183.38 points, or 1.7 percent, to 11,123.33 today. The Russell 2000 Index of small companies jumped 2.4 percent, extending its three-day advance to 11 percent, the biggest rally since March 2009.

“Europe has been a significant cloud hanging over our heads,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “If there’s something more long-term in nature as compared to a short-term fix, the market will look very favorably on that, especially the financial sector.”

The S&P 500 this week came within 1 percent of extending its decline from its April peak to 20 percent, the common definition of a bear market. Concern over Europe’s debt crisis sent the index to a one-year low on Oct. 3, pushing it to 12.02 times reported earnings, according to data compiled by Bloomberg. That was the cheapest valuation level since 2009.

‘Downside Risks’

European Central Bank President Jean-Claude Trichet said the ECB will resume covered-bond purchases and reintroduce yearlong loans for banks, while defying calls for an interest- rate cut and acknowledging “downside risks” to the economy have intensified. The European Commission is pushing for a coordinated capital injection for banks to shield them from the fallout of a potential Greek default.

“People have priced in a Lehman II type of situation,” Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, said in a telephone interview. “You start to hear some credible stuff on European bank recapitalization. They will do what they’ve got to do to prevent a Lehman from happening.”

The KBW Bank Index rallied 4.6 percent. Geithner said U.S. financial firms have strengthened and there is “absolutely” no chance of another collapsing like Lehman Brothers Holdings Inc. in 2008. Geithner, testifying today before the Senate Banking Committee in Washington, didn’t mention any banks by name when responding to a question about Morgan Stanley.

‘Very Modest’

“The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest,” he said. “Our firms, and this is true across the largest institutions in the United States, again are in a much stronger position if you look at their capital levels, levels of leverage, how they’re funded.”

Bank of America Corp. rose 8.8 percent, the most in the Dow, to $6.28, while JPMorgan Chase & Co. added 5 percent to $32.38. Morgan Stanley climbed 4.8 percent to $15.18. Citigroup Inc. increased 5.3 percent to $26.02.

Stocks also rose as data showed that claims for U.S. unemployment benefits rose less than forecast last week. Government data tomorrow are forecast to show employers added 55,000 workers to payrolls in September and the unemployment rate held at 9.1 percent, according to the median forecast of economists.

Most-Tied

The Morgan Stanley Cyclical Index of companies most-tied to the economy rose 2.6 percent. The Dow Jones Transportation Average added 2.2 percent. Alcoa gained 5.4 percent, the second- biggest gain in the Dow, to $9.88. The company will mark the unofficial start of the earnings season when it reports results on Oct. 11.

A gauge of retailers in the S&P 500 rose 2.1 percent. Target and Limited Brands Inc. helped September retail sales beat analysts’ estimates as promotions drove consumers to increase purchases amid concerns the economic recovery may stall. Target jumped 4.3 percent to $51.91. Limited, owner of the Victoria’s Secret chain, rose 0.8 percent to $40.59.

Yahoo! Inc. lost 1.7 percent to $15.65. Microsoft Corp. isn’t anywhere close to making an offer for the company and senior executives of the software maker aren’t involved in discussions, two people familiar with the matter said. Yahoo surged 10 percent yesterday on a Reuters report that Microsoft may make a bid.

Trading Range

Excluding its dip to a 13-month closing low of 1,099.23 on Oct. 3, the S&P 500 has mostly traded between about 1,120 and 1,220 for the past two months. Of the 14 other trading range instances since 1990, more than 75 percent resulted in gains over the following one, three and six months, according to Birinyi Associates Inc., the Westport, Connecticut-based money management and research firm.

The average trading range lasts about seven months, with the shortest one beginning in March 1998 and lasting three months, Birinyi data show.

“The market’s been in a trading range,” Wasif Latif, vice president of equity investments at USAA Investment Management Co. in San Antonio, which oversees about $50 billion, said in a telephone interview. “We’ll need clear economic data or policy movements out of Europe to break out that range.”

Wall Street strategists say the S&P 500, after falling within 1 percent of a bear market this week, will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis.

“Investors are way too bearish and are being swayed by macro variables,” Brian Belski, the New York-based chief investment strategist at Oppenheimer, wrote in an e-mail on Oct. 4. “Fundamentals drive stocks,” he said. “U.S. portfolios are not positioned for a positive third-quarter earnings season.”

--Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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