Markets & Finance

Dow, S&P Shrug Off China to Hit Records


The resilient U.S. indexes reached all-time closing highs Wednesday—despite a Shanghai-led wobble in global markets

Global market jitters? Bah. U.S. investors brushed aside a plunge in the Chinese stock market -- and attendant weakness in other global bourses -- to push blue chip equity indexes to new record closing levels Wednesday.

The trouble, such as it was, started in China. The Shanghai CSI 300 index plunged 6.5% overnight after Beijing tripled the tax on securities transactions to cool off China's stock market. But U.S. investors, initially alarmed, had shrugged off the news by midday. By the end of trading, the Dow finished at an all-time high and the S&P 500, after a seven year wait, eclipsed its March 2000 all-time closing high of 1,527.46.

The S&P 500's milestone was particularly notable, as the index is designed to represent the broader U.S. stock market. As such, its record close on Wednesday is a sign that stocks are finally out of a hole dug when equity prices, especially those of technology firms, collapsed earlier this decade. A key question is whether news of the S&P 500 record will draw yet more money into the market.

Another key difference between then and now: At it last peak in March, 2000, the index traded at a price-to-earnings ratio of around 27.8. As of May 29, 2007, the "500" fetched a multiple of 17.1, implying that equity prices are more sensibly valued.

Investors took the mild reaction to China's news as confirmation of how strong the current bull market really is, says John Merrill, chief investment officer at Tanglewood Capital Management. "People are looking to put money into this market," he says. Investors are bidding just below asking prices and seem to be buying whenever prices dip.

A similar market drop in China in February pushed down stocks worldwide. European and other Asian markets also fell modestly overnight. But U.S. investors, knowing stocks recovered from that disruption, seemed to learn from past mistakes, Merrill says. "The ones frightened last time around ended up getting burnt," he says.

Markets also received some economic news on Wednesday, with an additional dose expected Thursday and Friday. Minutes from May 9 released Wednesday afternoon show the Federal Reserve remains concerned about inflation, but sees risks of an economic slowdown diminishing, Standard & Poor's says.

On Wednesday, the Dow Jones industrial average was up 0.83%, or 111.74 points, to 13,633.08. The broader S&P 500 index, was up 0.80%, or 12.12 points, to 1,530.23.

The tech-heavy Nasdaq Composite index was up 20.53 points, or 0.80%, to 2,592.59.

Though alarmed at first, investors soft-pedaled the news from China. The Chinese tax on stock transactions - increased from 0.1% to 0.3% - is still rather small. However, it may be a preview to bigger government moves if stock markets fail to cool off, says Edmund Harriss, of London-based Guinness Atkinson Funds.

Nevertheless, the fallout from the Chinese sell-off should be limited, Harriss says. China's stock markets still aren't well-integrated into the broader Chinese economy. The vast majority of Chinese firms get their capital from banks, not stocks. "A fall [or rise] in the stock market cannot be taken as a gage of the well-being of the Chinese economy at large," Harriss says. International markets seem to understand this better now than they did in February, when a drop in China caused a worldwide correction, notes Harriss. Stocks were down modestly worldwide on Wednesday.

Chinese stocks listed in the U.S. fared much better than stocks listed in Shanghai or Shenzhen. Petrochina (PTR) and CNOOC Ltd. (CEO) were both about 0.2% lower. Baidu.com, Inc. (BIDU) was up about 2.5%.

With earnings season over, investors are closely watching a long list of economic data expected this week, including the May employment report and data on the gross domestic product, factory activity, construction spending and manufacturers' shipments, inventories and orders. Standard & Poor's saw little reaction to news on Wednesday that MBA Mortgage applications fell, the ADP employment index rose 97,000, and consumer comfort fell.

In the energy markets, July crude oil futures on the NYMEX were up 29 cents to $63.49. Oil prices were pushed higher by expectations of higher refinery usage, Action Economics says.

Among stocks moving on Wednesday, Google (GOOG) was up after the company confirmed on Tuesday that the Federal Trade Commission is investigating its proposed $3.1 billion acquisition of DoubleClick.

CDW Corp. (CDWC) was moved up after it agreed to be acquired by Madison Dearborn Partners LLC in a $7.3 billion deal. The $87.75 per share offer represents a 5.6% premium on Tuesday's closing price.

Qualcomm (QCOM) was trading lower after a federal jury found its products infringe three patents owned by Broadcom (BRCM) and awarded Broadcom $19.6 million in damages.

Williams-Sonoma (WSM) was higher after the retailer reported earnings of 16 cents per share, vs. 20 cents a year ago. Same store sales dropped 0.8% and total sales were up 2.7%. It also cut earnings guidance for the second quarter but reiterated its expectations for 2008.

IBM (IBM) was up after raising its outlook for 2007 earnings growth to 13%-14% from 11%. Two to three percentage points of growth, or about 14 to 17 cents per share, come from $12.5 billion in accelerated stock repurchases, the company says.

Borders Group (BGP) was trading lower after it reported a 61 cent loss per share in the first quarter, vs. a 31 cent loss a year ago. Same-store sales were down 1.8% at domestic Borders, 1% lower at Waldenbooks and 2.5% lower at international Borders stores.

Pennsylvania Real Estate Investment Trust (PEI) was trading up almost 8% on speculation that the firm could be the subject of a buyout.

European stock markets fell on Wednesday. In London, the FTSE 100 index was down 0.26% to 6,589.20. Germany's DAX index fell 0.51% % to 7,741.58. In Paris, the CAC 40 index was 0.35% lower to 6,035.06.

Asian markets were down. In Japan, the Nikkei index fell 0.48% to 17,588.26. In Hong Kong, the Hang Seng Index was down 0.86% to 20,293.76 and in China, the Shanghai Composite index fell 6.5% to 4.053.09. Chinese officials, seeking to cool off their markets, announced an increase in a tax on stock transactions overnight.

Treasury Market

Treasury notes moved higher on Wednesday, but then fell when stocks recovered late in the day. The 10-year note edged up 03/32 to 97-03/32 for a yield of 4.87%; the 30-year bond rose 07/32 to 96-04/32 for a yield of 5.00%.

Standard & Poor's says an upbeat stance on the economy in Fed minutes helped push bond prices lower. Also, S&P says, the 10-year notes face technical resistance pushing past the 4.9% yield level.

Steverman is a reporter for BusinessWeek's Investing channel.

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