The Wall Street Journal-20080124-Stocks Reverse Early Losses- Close Up 2-5-
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Stocks Reverse Early Losses, Close Up 2.5%
The nation's stock market did an about-face, rising nearly 600 points from its morning low to finish deep in positive territory, as investors put aside worries about struggling banks and declining profits and poured money into shares.
The rally, which followed two days in which anxious investors drove stocks sharply lower around the globe, culminated in a 30-minute buying frenzy that left the Dow Jones Industrial Average at 12270.17, up 298.98 points, or 2.5%.
The Dow's 631.86-point intraday swing was its biggest since July 2002, one of the low points of the last bear market. There have been just nine days with 500-plus point swings since 1995, many of which occurred at major market turning points.
"It was a whiplash rally," said Steven Grasso, trading manager on the floor of the New York Stock Exchange for brokerage firm Stuart Frankel.
The rally was supercharged late in the day by news that insurance regulators met with major Wall Street firms to discuss ways to stabilize and potentially bail out big bond insurers. These insurers have taken a hit because of their exposure to securities tied to subprime mortgages. Their instability threatens the wider financial system because they insure tens of billions of dollars in bonds, many of them held by Wall Street firms.
Major bond insurers' stocks soared on news of the meeting. MBIA Inc. rose 33%, and Ambac Financial Group Inc. shares were up 72%. Financial stocks gained more than 8%.
Shares of the nation's major banks and brokerage firms have been strong since the Federal Reserve announced a surprise three-quarter- percentage-point cut in interest rates Tuesday. Their strength suggests investors believe the worst may be over for financial stocks, which have led the market lower since last summer.
Investors' concerns appeared to shift to broader worries about the outlook for profits in the event of a recession. Profits surged during the last bull market and were the main driver of stock performance until sputtering in the past two quarters.
Profit concerns were clearly evident in technology stocks yesterday. Apple Inc. and Google Inc. ended down 11% and 6.1%, respectively. Investors dumped Apple shares after the company reported strong earnings but a tempered outlook. Google shares fell on worries about its spending on wireless spectrum and the outlook for advertising.
Many of the day's big losers, including energy stocks, are seeing either slower growth or declines in profit. "It's just starting to creep into people minds that, 'Gee, we could have an earnings decline this year,'" said David Kostin, stock-market strategist at Goldman Sachs Group Inc.
But as the market turned in the afternoon, nearly all sectors rose. Volume hit new highs of 7.38 billion shares on the New York Stock Exchange and 3.59 billion shares on the Nasdaq Stock Market, up from previous records set in August. The Nasdaq Composite Index climbed out of bear-market territory to end up 1%, snapping a six-day losing streak. The Dow, which logged its biggest gain since last November, remains down 7.5% for the year.
The rally in financials and other sectors driven by interest rates was due in part to the market's assumption that the Fed will cut rates again when its policy makers meet next Tuesday and Wednesday. At that meeting, the Federal Open Market Committee will have to decide how much more it should push down rates to rescue the economy.
Yesterday, shares of major home builders gained 13%. Typically home building is among the first industries to rise when the Fed starts cutting rates because mortgage rates also fall. But this time, with the housing market in a deep slump, home builders' shares had a delayed response to Tuesday's rate cut.
With worries about the financial system abating, fears of an economic and profit slowdown remained strong. Indeed, stocks in Europe fell sharply, with shares in London down 2.3%, Germany down 4.9% and France down 4.2%, on worries that the economic slowdown in the U.S. would spread globally.
In the U.S., after years of record profit growth, the debate on Wall Street is whether companies will be able to scratch out small profit gains this year or if a U.S. recession and global slowdown will lead to a decline in earnings.
The risk is that many analysts still expect earnings to rebound strongly. Profits for companies in the Standard & Poor's 500-stock index are likely to grow 18% in 2008, according to Thomson Proprietary Research. That's up from an October forecast of 12% earnings growth.
But as the current earnings season unfolds more on Wall Street are wondering if expectations for profit gains this year are going to turn out to have been wishful thinking. When, for example, market darling Apple warned analysts Tuesday to notch down their forecasts for the company's sales in the second quarter, it was viewed as a potential bellwether. Another possible trouble spot is energy companies, which have been posting record earnings, thanks to the global economic boom and surging oil prices. An easing of demand and a decline in prices could put a dent in their profit prospects.
"It's amazing how long the consensus number looking for double-digit gains has held up," said Robert Doll, chief global investment officer for stocks at BlackRock Inc. "I'd say it's a greater than 50% chance that profits are negative" in 2008.
The bull market that began in late 2002 was largely a reflection of a record boom in corporate profits. For six years beginning with the second quarter of 2001, profits of S&P 500 companies rose virtually every quarter. With earnings gaining strongly, stock prices didn't get stretched to nearly the degree they did during the technology-stock bubble, when investors were willing to bid up the price they would pay for a dollar of earnings.
That streak ended in the third quarter of last year, when operating profits fell 4.5% thanks almost entirely to losses posted by financial companies, according to Thomson Financial. Fourth-quarter earnings, which are coming out now, are estimated to have fallen 19.6%, with financial companies accounting for nearly all of the decline. But Wall Street expects profits to bounce back this year, in large part because of a rebound forecast for the second half of the year.
Now, more and more analysts are marking down their earnings expectations. "At an inflection point, it does happen that the analysts get caught going one way while corporate profitability goes the other way," said Michael Thompson, director of research at Thomson Financial.
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Aaron Lucchetti and Robin Sidel contributed to this article.
