WALL STREET ENJOYS UPBEAT START TO 2009
Wall Street started the new year with a big rally Friday, as investors, brushing aside a disappointing report on manufacturing, sent the Dow Jones industrials up more than 250 points and to their first close above 9,000 in two months. All the major indexes shot up more than six percent for the week.
The Institute for Supply Management said its manufacturing activity index fell to the lowest level in 28 years in December. But the market held to its recent pattern of taking bad economic news in stride, a pattern that began to emerge after it touched multiyear lows on Nov. 20. Investors tend to look anywhere from three to nine months into the future when they make their moves.
“Over the last month you’ve started to see a change in sentiment and this certainly advances that,” said Carl Beck, partner at Harris Financial Group in Richmond, Va.
Economic data have been terrible for months and investors have shown little surprise even as some readings fell well short of economists’ already low expectations. During past recessions, the market has recovered ahead of the economy by growing numb to a stream of poor data and looking for signs that the downturn isn’t worsening.
The ISM, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November. Economists polled by Thomson Reuters had expected a reading of 35.5; a figure below 50 indicates contraction.
Wall Street’s move higher comes amid light trading after the New Year’s holiday. Modest volume can lend buoyancy to the market as upbeat buyers have reason to come out and those with less conviction stay home.
The final session of the week follows a terrible year for investors. The Dow fell 33.8 percent in 2008, its worst performance since 1931.
Still, the market’s move higher was welcome.
“We like to see the markets shrug off the bad news. That typically is a sign that we’re forming a bottom,” said Eric Thorne, an investment adviser at Bryn Mawr Trust.
According to preliminary calculations, the Dow rose 258.30, or 2.94 percent, to 9,034.69, finishing the week up 6.1 percent. The blue chips last closed above 9,000 on Nov. 5, when they stood at 9,139.27.
Like the Dow, broader stock indicators also advanced for the third straight session. The Standard & Poor’s 500 index rose 28.55 percent, or 3.16 percent, to 931.80, its highest close since Nov. 5. The Nasdaq composite index rose 55.18, or 3.50 percent, to 1,632.21.
For the week, the S&P 500 finished up 6.8 percent, while the Nasdaq rose 6.7 percent.
The Russell 2000 index of smaller companies rose 6.37, or 1.28 percent, to 505.82.
Advancing issues outnumbered decliners by about 5 to 1 on the New York Stock Exchange, where volume came to a light 1.04 billion shares.
Bond prices fell as investors took on riskier assets. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.40 percent from 2.22 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.09 percent from 0.08 percent Wednesday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.
Thorne contends 2009 could be a strong year for Wall Street because most investors are so shaken from the sell-off in 2008, which erased six years of gains in stocks. Market bottoms often emerge because investors are so pessimistic or because stocks seem incapable of making any sustained recovery.
“A bottom isn’t formed in one day or even in one month but probably over several months,” he said. “Expectations are extremely low for the economy, for corporate earnings and for the stock market itself.”
From Nov. 20 to the end of 2008, the Dow advanced 16.2 percent, while the S&P 500 rose 20 percent.
“We’re very confident that the $9 trillion that is in cash right now will look to find a home in better-performing assets,” he said, referring to the amount of money invested in conservative but low-yielding areas like money market funds. Yields on safe investments like Treasurys have fallen to virtually nil as investors have clamored for safety and surrendered hopes of even earning a return on their money.
Todd Leone, managing director at Cowen & Co., cautioned against reading too much into Friday’s advance and said the first full week of the new year should provide insight into investor sentiment for 2009.
“The first five days are usually very telling,” Leone said. “I’m not sure we’ll be up or down.” He said an advance in stocks Friday wasn’t a surprise as some investors start the year by wading into the market. He said selling is more likely to occur next week.
Investors had little corporate news to go on Friday other than the completion this week of some major banking acquisitions. Bank of America Corp. finalized its deal to acquire Merrill Lynch & Co. Wells Fargo & Co. closed its acquisition of Wachovia Corp., while PNC Financial Services Group Inc. bought National City Corp.
The dealmaking came after the mortgage and credit turmoil torpedoed bank’s balance sheets and sent banks’ stocks tumbling. In some cases, banks grappling with liquidity shortages and rising loan losses were forced to make deals to remain in business.
Next week brings a flurry of economic readings and potentially early comments from companies on their 2008 results and 2009 forecasts.
A Labor Department report next Friday on December employment is expected to draw attention. A month ago, Wall Street showed newfound resiliency in the face of a bad reading on what is typically the most important economic report of the month. Stocks initially sagged but finished with big gains Dec. 5 after the government reported that employers slashed a larger-than-expected 533,000 jobs in November. Investors were hoping the poor report would prompt Washington to take broader steps to shore up the economy.
“The employment numbers will almost undoubtedly be very ugly. What will be interesting to see is what the market’s reaction will be to those numbers,” said Thorne. “We’re also very interested to see what the corporate earnings reporting season will be like.”
Harris Financial’s Beck said the earnings reports could be a wake-up call for investors. “People expect earnings to be really bad. If they come out and they’re not quite as bad, you could see this momentum in the market continue,” he said. “If they come out even worse than expectations, that could be a major set back.”
Stocks overseas also began the new year with a rally. Britain’s FTSE 100 rose 2.88 percent, Germany’s DAX index jumped 3.39 percent, and France’s CAC-40 increased 4.09 percent. Markets in Japan were closed for a holiday.