U.S. Stocks Rally as Economic Growth Tops Estimates; Banks Gain

By Lynn Thomasson

Aug. 28 (Bloomberg) -- U.S. stocks climbed for a third day, led by manufacturers and financial companies, after growth in exports helped the economy expand faster than estimated in the second quarter.

American International Group Inc., Caterpillar Inc. and AT&T Inc. climbed 2 percent each and helped lead gains in nine of ten industry groups in the Standard & Poor's 500 Index after the Commerce Department said gross domestic product grew at a 3.3 percent annual rate. Energy producers rose as Tropical Storm Gustav's threat to production facilities sent oil higher for a fourth day. Tiffany & Co., the world's second-largest luxury jewelry retailer, jumped the most in three years on profit that topped analysts' estimates.

``You're getting stronger growth, and that is conceivably good for equities,'' said Alan Gayle, the Richmond, Virginia- based senior investment strategist at Ridgeworth Capital Management, which oversees about $70 billion. ``A number like this above 3 percent suggests that the economy is not as bad as a lot of the recent commentary has suggested.''

The S&P 500 gained 8.21 points, or 0.6 percent, to 1,289.87 at 10:22 a.m. in New York. The Dow Jones Industrial Average rose 95.1, or 0.8 percent, to 11,597.61. The Nasdaq Composite Index added 11.18 to 2,393.64. Almost two stocks rose for each that fell on the New York Stock Exchange.

August Advance

The S&P 500 extended its August gain to 1.8 percent as the GDP report showed businesses are weathering rising inflation and more than $500 billion in subprime-related bank losses. The government's initial estimate of economic growth was 1.9 percent last month and economists in a Bloomberg survey on average projected 2.7 percent. The data follows an unexpected advance in durable goods orders that helped boost stocks yesterday.

Three of the biggest gains in the S&P 500 today were MBIA Inc., Fannie Mae and Freddie Mac, which have all lost at least 22 percent this year.

AIG, the largest U.S. insurer, climbed 43 cents to $20.43. Caterpillar, the biggest maker of bulldozers, increased $1.42 to $70.98. AT&T, the top U.S. phone company, added 71 cents to $31.91.

Fannie Mae, the biggest U.S. mortgage-finance company, gained 5 percent to $6.81. Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 percent drop in the shares.

Financial stocks in the S&P 500 climbed 1 percent, capping their first three-day advance since the middle of July.

Bond Insurers Gain

MBIA, the largest bond insurer, jumped 21 percent for the top gain in the S&P 500 after agreeing to reinsure municipal bonds for Financial Guaranty Insurance Co. MBIA led bond insurers posting record losses after straying from the business of backing municipal bonds to guaranteeing collateralized debt obligations that have tumbled in value.

Ambac Financial Group Inc., the bond insurer that lost about three-fourths of its market value this year, gained 65 cents to $5.88.

Tiffany had the steepest gain since 2005, rising 12 percent to $44.45. The retailer posted profit that exceeded analysts' estimates on better-than-expected sales and predicted higher annual earnings than previously estimated.

Exxon Mobil Corp. and Chevron Corp. led energy shares to a third straight advance as oil climbed to nearly $119 a barrel. Royal Dutch Shell Plc, BP Plc and ConocoPhillips evacuated Gulf of Mexico rigs as Gustav approached.

Coca-Cola, Brown Forman

Coca-Cola Co. lost 1.3 percent to $53.11 for the biggest of only four declines in the 30-stock Dow average. The world's biggest sodamaker was cut to ``neutral'' from ``outperform'' at Credit Suisse Group AG, which said rival PepsiCo Inc. is a better bet because it's further along with a restructuring.

Brown-Forman Corp. fell the most in the S&P 500, losing 5.9 percent to $72.48. The maker of Jack Daniel's and Southern Comfort whiskey reported a profit decline and trailed analysts' estimates after writing down the value of dead agave plants used for making tequila.

Coca-Cola and Brown-Forman led the S&P 500 Consumer Staples Index to the only retreat among the 10 main industries in the index.

The S&P 500 is poised to complete only its third monthly advance since reaching a record in October. It is still down more than 13 percent this year.

The S&P 500's August gain has been led by so-called consumer discretionary companies, which include retailers and hotel and restaurant chains. The S&P 500 Consumer Discretionary Index rallied 5.7 percent this month through for the best gain among 10 industries as of the close of trading yesterday.

Energy Concern

The group was helped by an 18 percent retreat in oil prices from a July record. Limited Brands Inc., owner of the Victoria's Secret lingerie chain, has led the advance with a 23 percent gain after posting profit that topped analysts' estimates and predicting full-year earnings will exceed its earlier projections.

The four-day gain in crude has threatened the rally in consumer shares this week as concern grows that Gustav will cause the most damage to Gulf of Mexico energy facilities since Hurricane Katrina.

An index of technology shares in the S&P 500 has had the second-best return in August with a 3.7 percent gain through yesterday, led by a 44 percent jump in Advanced Micro Devices Inc.

Banks, brokerages and insurers have fared the worst in August, with the S&P 500 Financials Index down 5 percent in August through yesterday on concern a government bailout of Fannie Mae and Freddie Mac will wipe out shareholders. The two largest U.S. mortgage-finance companies fell more than 40 percent each in August through yesterday.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.