Bloomberg News

S&P 500 Caps Longest Weekly Gain Since February on Europe Bets

October 21, 2011

Oct. 21 (Bloomberg) -- U.S. stocks advanced, giving the Standard & Poor’s 500 Index its longest weekly rally since February, amid speculation of an agreement to contain Europe’s debt crisis and further Federal Reserve stimulus.

Morgan Stanley and Wells Fargo & Co. added at least 2.1 percent as European lenders rallied. Alcoa Inc. and Boeing Co. rose more than 2.8 percent, pacing gains in companies most-tied to the economy. McDonald’s Corp. climbed 3.7 percent after profit jumped as lower-priced items boosted U.S. store sales. Honeywell International Inc. advanced 5.8 percent as a recovery in commercial aerospace helped earnings climb 44 percent.

The S&P 500 increased 1.9 percent to 1,238.25 as of 4 p.m. New York time, the highest level since Aug. 3. The gauge rose 1.1 percent since Oct. 14, gaining for a third straight week. The Dow Jones Industrial Average climbed 267.01 points, or 2.3 percent, to 11,808.79 today, erasing its 2011 decline.

“There’s a sense that Europe will come out with something that will calm down imminent fears of the crisis escalating out of control,” James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $360 billion, said in a telephone interview. “Markets are also digesting Federal Reserve lip service given to additional quantitative easing moves. However, it appears most investors are unsure whether additional easing is needed.”

Gains accelerated after the S&P 500 climbed past 1,233.10, its intraday peak on Oct. 18. A burst of trading in E-Mini S&P 500 futures occurred at that level, according to data compiled by Bloomberg. Volume jumped to 31,774 contracts at 10:17 a.m. New York time, the most for any minute of the day at that point. Three rallies since the U.S. government was stripped of its AAA credit rating by S&P have stopped around 1,220.

‘Least Resistance’

“The path of least resistance is higher,” Christopher Verrone, head of technical analysis at New York-based Strategas Research Partners, said in a phone interview. “I’m interested to see what happens in the 1,260-1,270 range. That is when we’ll get more information on how durable this advance is.”

France retreated in a clash with Germany over how to expand the power of Europe’s bailout fund after the first meeting in a six-day marathon intended to solve the debt crisis. France’s view that the fund, the European Financial Stability Facility, should get a banking license enabling it to borrow from the European Central Bank, “is not a definitive point of discussion for us,” French Finance Minister Francois Baroin told reporters today in Brussels. “What matters is what works.”

‘Comprehensive’ Plan

French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet tomorrow in Brussels before a summit the next day and a follow-up leaders’ gathering on Oct. 26 to nail down what they’ve called a “comprehensive” plan.

“While we won’t get a definitive response from the Europeans this weekend on how best to deal next with their debt crisis, officials are still holding out hope that just a few extra days will complete the job,” Peter Boockvar, an equity strategist at Miller Tabak & Co., wrote in a note today.

American banks rallied following gains in European lenders. Morgan Stanley rose 2.5 percent to $17.02. Wells Fargo added 2.1 percent to $26.31.

Investors also reacted to comments from Fed Governor Daniel Tarullo, who late yesterday called for resuming large-scale purchases of mortgage bonds, boosting chances of a third round of asset buying aimed at reviving growth. Today, Fed Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary.

‘High Hurdles’

“While the hurdles for QE3 remain high, it’s still on the table as an option,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion, said in a telephone interview. “It becomes a question of whether or not it’s effective.”

The Morgan Stanley Cyclical Index of companies most-tied to the economy rose 3 percent. The Dow Jones Transportation Average, a proxy for the economy, added 2.2 percent. Alcoa, the largest U.S. aluminum producer, advanced 2.8 percent to $10.23. Boeing climbed 3.4 percent to $64.59.

Earnings reports have also gained investors’ attention today. Profit for S&P 500 companies will climb 16 percent in the third quarter and rise 18 percent to a record $99.25 for all of 2011, according to analyst estimates compiled by Bloomberg. About three quarters of the S&P 500 companies that reported results since Oct. 11 beat analysts’ estimates.

McDonald’s added 3.7 percent to $92.32. Chief Executive Officer Jim Skinner has sought to draw American diners with low- priced menu items, such as the $1 McDouble burger, as the nation’s 9.1 percent unemployment rate saps consumer confidence. Sales in the U.S. were driven by fruit smoothies, Chicken McNuggets and breakfast foods, the company said.

Honeywell Climbs

Honeywell climbed 5.8 percent to $51.28 as the company also increased its full-year forecast. Honeywell and other U.S. manufacturers have posted earnings growth this year amid a slowing economy by keeping costs in check and expanding abroad. Aerospace sales rose 8 percent in the quarter, the company said.

Seagate Technology Plc surged 28 percent, the most since it went public in 2002, to $15.42. ThinkEquity LLC analysts said that the maker of disk drives may gain market share from rival Western Digital Corp. due to recent Thai floods.

Energy and raw material producers gained as the S&P GSCI Index of commodities advanced 1 percent. Freeport-McMoRan Copper & Gold Inc. gained 5.2 percent to $36.58. ConocoPhillips added 2.2 percent to $71.83.

General Electric Co. slid 1.9 percent, the biggest decline in the Dow, to $16.31 as tighter profit margins in industrial businesses from energy to aviation overshadowed third-quarter growth led by the finance unit.

Transport Companies

Companies transporting holiday merchandise may outperform the stock market as a rise in consumer spending indicates seasonal shopping may be better than forecast.

Retailers were cautious when they placed orders this summer amid concerns the economy was “falling apart” and headed for a double-dip recession, said David Ross, a Baltimore-based transportation analyst at Stifel Nicolaus & Co. Even though September retail sales rose the most in seven months, shares of trucking and airfreight companies still reflect pessimistic forecasts, he said.

“There is a greater chance of a positive holiday-shopping surprise than a negative one,” said Ross, who maintains “buy” ratings on United Parcel Service Inc. and Old Dominion Freight Line Inc. If retailers are caught short after under-ordering, the peak shipping period -- typically July through September -- will occur later, he said.

--With assistance from Anna-Louise Jackson and Anthony Feld in New York. Editors: Jeff Sutherland, Nick Baker

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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