Bloomberg News

S&P 500 Extends Biggest Monthly Rally Since 1974 on Europe Deal

October 27, 2011

Oct. 27 (Bloomberg) -- U.S. stocks rose, extending the biggest monthly rally since 1974 for the Standard & Poor’s 500 Index, as European leaders agreed to expand a bailout fund to $1.4 trillion and American economic growth accelerated.

Bank of America Corp. and JPMorgan Chase & Co. advanced at least 8.3 percent, following gains in European lenders. The Dow Jones Transportation Average, a proxy for the economy, jumped 4.5 percent. The index extended its October rally to 20 percent and is poised for its best monthly gain since 1939. Alcoa Inc. and General Electric Co. climbed more than 6.2 percent to pace gains in companies most-dependent on economic growth.

The S&P 500 rose 3.4 percent to 1,284.59 at 4 p.m. New York time, erasing its 2011 loss and rising to the highest level since Aug. 1. The gauge has climbed 14 percent so far in October. The Dow Jones Industrial Average added 339.51 points, or 2.9 percent, to 12,208.55. The Russell 2000 Index of small companies rallied 5.3 percent and is up 19 percent in October. About 11.9 billion shares changed hands on U.S. exchanges at 4:30 p.m., or 29 percent above the three-month average.

“This sort of half-baked solution out of Europe comes at a good time,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees $1 billion, said in a telephone interview. “The market simply wanted to say -- OK, we’ll give them a chance to work things out. They can mess it up, but my best guess is we put this behind us.”

Concern over Europe’s debt crisis sent the S&P 500 to a one-year low earlier this month. The index came within 1 percent of extending its decline from its April peak to 20 percent, the common definition of a bear market. Since then, it has risen 17 percent on optimism Europe would contain its crisis.

Crisis Fighting

Global stocks rallied as European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area. Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

“The European agreement takes the catastrophic scenario off of the table, which is positive for risk spreads and a catalyst for valuation expansion,” Myles Zyblock, chief institutional strategist at RBC Capital Markets, wrote in a note today. He raised his recommendation for U.S. equities to “market weight” from “below benchmark.”

Record Monthly Drop

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, tumbled 15 percent to 25.46. The measure known as the VIX retreated 41 percent so far in October, poised for a record monthly drop.

A gauge of financial stocks in the S&P 500 jumped 6.2 percent today as all 81 of its companies rose. It has rebounded 25 percent from a two-year low on Oct. 3, entering a bull market. Bank of America increased 9.6 percent to $7.22. JPMorgan added 8.3 percent to $37.02.

Stocks also rose after the U.S. economy grew in the third quarter at the fastest pace in a year as gains in consumer spending and business investment helped support a recovery on the brink of faltering. Separate data showed that fewer Americans filed applications for unemployment assistance last week, while those on benefit rolls dropped to a three-year low, signaling limited improvement in the labor market.

Housing Data

The number of contracts to purchase previously owned U.S. homes unexpectedly fell in September as lower prices and borrowing costs failed to support demand, according to another report.

The Morgan Stanley Cyclical Index of companies most-reliant on economic growth climbed 5.2 percent. Alcoa, the largest U.S. aluminum producer, jumped 9.5 percent to $11.34. GE gained 6.2 percent to $17.37.

“The risk of a U.S. recession has diminished,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.3 trillion as the world’s largest asset manager. “It really comes down to -- if Europe can avoid a crisis, then the market can move higher.”

Akamai Technologies Inc. climbed 15 percent to $27.45. The company, whose server network lets businesses speed data delivery, forecast fourth-quarter sales that topped some analysts’ estimates.

Japan Sales

Aflac Inc. jumped 8.7 percent to $46.77. The health insurer that gets more than 70 percent of its sales in Japan said third- quarter profit rose 7.8 percent as the yen strengthened against the dollar.

Avon Products Inc. tumbled 18 percent, the most in the S&P 500, to $18.81. The door-to-door cosmetics merchant said the U.S. Securities and Exchange Commission is investigating the company’s contacts with financial analysts. The company also reported profit that missed analysts estimates.

Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, said he’s bullish on U.S. housing stocks and is buying dividend-paying equities.

Miller, who gained fame for beating the S&P 500 for a record 15 straight years through 2005, said there are “great opportunities” in U.S. stocks and predicted the S&P 500 may extend its rebound from this year’s low.

--With assistance from Lynn Thomasson in Hong Kong. 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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