Better than expected profit reports from the likes of McDonald's and PNC Financial countered mixed economic news Thursday
U.S. stocks finished with strong gains Thursday as better-than-expected earnings reports lured buyers back into the market after two days of losses. Earnings from Dow components McDonald's (MCD), 3M (MMM), and AT&T (T), along with a better than expected report from regional bank PNC Financial (PNC) helped to fuel Thursday's rally, offsetting a mixed bag of economic news on jobless claims, leading indicators and home prices.
Also Thursday, the Federal Reserve proposed to police executive pay at banks.
On Thursday, the 30-stock Dow Jones industrial average finished higher by 131.95 points, or 1.33%, at 10.081.31. The broad Standard & Poor's 500-stock index was up 11.51 points, or 1.06%, at 1,092.91. The tech-heavy Nasdaq composite index added 14.56 points, or 0.68%, to 2,165.29.
On the New York Stock Exchange, 20 stocks were higher in price for every 10 that declined. Breadth on the Nasdaq was 15-11 negative.
Treasuries were lower after a Reuters report that Moody's Investors Service said the U.S. could lose its AAA rating due to spending. Wednesday's Beige Book report on economic conditions from the Federal Reserve said conditions "stabilized," but labor, credit, and spending were weak.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.41% from 3.39% late Wednesday.
The dollar rose against other major currencies, while gold futures fell. Oil futures also moved lower.
Overseas markets were lower following the U.S. market's drop Wednesday, and as uncertainty mounted about Chinese stimulus measures aimed at pumping up that country's economy. Japan's Nikkei stock average fell 0.6%. Britain's FTSE 100 declined 0.96%, Germany's DAX index dropped 1.21%, and France's CAC-40 tumbled 1.35%.
Amazon.com (AMZN) shares surged in after-hours trading Thursday after the company said its third-quarter profit soared 62%, showing that consumers are comfortable opening their wallets to the online retailer despite the still-shaky economy.
On Thursday, the U.S. Treasury and the Federal Reserve unveiled a set of curbs and rules for executive compensation at U.S. banks, marking a watershed moment for government intervention in the private sector. (Read the Fed's Q&A on the topic.) The Fed is proposing that it more aggressively regulate compensation practices at banks under its control, including thousands of U.S. banks as well as the American subsidiaries of overseas firms. The central bank "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system," Chairman Ben Bernanke said.
The Fed in its proposal is not suggesting pay caps or banning particular practices, saying a "one size fits all" approach to compensation would not be appropriate. Rather, the Fed plans to review compensation policies at 28 large banks and at several regional, community and other banking organizations to ensure incentive compensation practices do not encourage excessive risk taking.
The market got a boost Thursday from news that PNC Financial Services (PNC) reported third-quarter earnings per share (EPS) of $1.00, vs. $0.70 one year earlier, on higher net interest and noninterest income. The company said credit quality deterioration occurred at a slower pace during the third quarter.
Investors were poring over numerous earnings reports from a wide variety of sectors for insight into the strength of consumers as they continue to deal with a weak jobs market. Consumer spending accounts for more than two-thirds of the economy.
Cigarette maker Philip Morris International Inc. (PM), printer and copier supply company Xerox Corp. (XRX), and Dow Chemical Co. (DOW) all reported weakening sales, but were able to beat profit expectations.
Earnings from UPS (UPS) were a disappointment after profits fell 43%
The mixed earnings signals continue to show an economy in flux.
Credit card lenders American Express (AXP) and Capital One Financial (COF) should provide clues into whether consumers are still struggling to repay loans, which has been a major problem for nearly the entire financial sector for the past two years. Both report after the market closes Thursday.
Microsoft (MSFT) rose moderately as it launched its new Windows 7 operating system.
On Thursday, the Conference Board released its index of U.S. leading economic indicators. The index rose 1.0% to 103.5 in September, better than the 0.7% that markets had expected and positive for sixth consecutive month. Eight of the 10 components contributed positively in September, led by the yield spread and consumer expectations. The average factory workweek and building permits were the only two indicators that negatively contributed to the index.
"Overall, the data were a bit better than expectations, to provide some support to stocks," says Standard & Poor's senior economist Beth Ann Bovino.
The Labor Department provided a disappointing employment picture Thursday morning, saying workers filing for jobless benefits for the first time rose more than expected last week. Initial claims rose 11,000 to 531,000 in the week ended October 17. It was larger than the 515,000 expected, though includes the Columbus Day weekend, to distort the data. The prior week was upwardly revised to 520,000 (previously 514,000). The 4-week moving average edged down to 532,250 from 533,000. Continuing claims dropped 98,000 to 5,923,000, pushing the insured unemployment rate down to 4.5% from a revised 4.6% the prior week (previously 4.5%). Some unemployed workers likely lost their benefits, to explain the drop in continuing claims, though the extended benefits program distorts the reading.
The U.S., which posted a record deficit in the last fiscal year, may lose its Aaa-rating if it does not reduce the gap to manageable levels in the next 3-4 years, Moody's Investors Service said on Thursday, according to a Reuters dispatch.