U.S. Stocks Post Biggest Weekly Gain Since 1974 on Valuations

By Elizabeth Stanton

Nov. 1 (Bloomberg) -- U.S. stocks staged their steepest weekly surge in 34 years after the Federal Reserve's interest- rate cut and signs the credit crisis is ebbing boosted equities trading at the lowest valuations in two decades.

The Standard & Poor's 500 Index still finished October with its worst monthly drop since 1987. Home Depot Inc., Walt Disney Co. and Target Corp. increased more than 15 percent, leading gains by companies that depend on discretionary spending by consumers. Verizon Communications Inc. rose the most in six years after sales beat estimates. PNC Financial Services Group Inc. and BB&T Corp. advanced after the Treasury agreed to infuse capital in at least 23 regional banks.

The S&P 500 climbed 10 percent to 968.75 this week, while the Dow Jones Industrial Average rose 11 percent to 9,325.01. Both rallied the most since October 1974 after closing at five- year lows on Oct. 27. The MSCI World Index of 23 developed markets jumped 9.8 percent to 957.25.

``There's a lot of inexpensive merchandise out there,'' said Warren Koontz, who oversees $2.5 billion as chief investment officer for large, value stocks at Loomis Sayles & Co. in Boston. ``The most I've seen in 25 years.''

The S&P 500 still sank 17 percent in October. The retreat drove its price-to-earnings ratio based on estimated 2008 profit to 10.7 on Oct. 27, the cheapest compared with the multiple using reported results since 1985.

$9.5 Trillion Lost

The October sell-off erased more than $9.5 trillion from the value of stocks worldwide, almost one-third of the total value wiped out this year, as credit-related losses and writedowns by financial firms approached $700 billion. The S&P 500 has slumped 34 percent in 2008.

Benchmark indexes for 67 of 68 markets tracked by MSCI Inc. declined in October, with 37 losing at least 20 percent. Bulgaria, Peru and Argentina did the worst, plunging more than 36 percent. Pakistan gained less than 0.1 percent.

All 10 industries in the S&P 500 advanced this week, led by consumer discretionary companies, after the Fed cut its target rate for overnight loans between banks to 1 percent, matching a half-century low. The companies gained even after Commerce Department data released Oct. 30 showed consumer spending dropped at a 3.1 percent annual rate in the third quarter, the most since 1980. The economy as a whole contracted at a 0.3 percent pace, its worst performance since 2001.

Home Depot, Disney

Home Depot, the world's largest home-improvement retailer, rose 27 percent to $23.59 for the steepest rally since it began trading in 1981. Disney, the No. 2 U.S. media company, advanced 15 percent to $25.91, the most since February 2004.

Target added 22 percent, the most in at least 28 years, to $40.12. William Ackman, whose hedge fund owns 10 percent of the discount retailer, said it should form a separate company to manage its $25 billion in real estate.

Staples Inc. climbed 35 percent, the most in its 19 years as a public company, to $19.43. The biggest U.S. office-supplies retailer forecast third-quarter profit exceeding some analysts' estimates and reiterated its long-term earnings projections.

Office Depot Inc., the second-largest office-supplies retailer, more than doubled to $3.60 for the biggest gain in the S&P 500. The 22 percent advance by retailers was the biggest among the 24 industry groups in the S&P 500, followed by real- estate companies. Homebuilders surged 34 percent.

Starbucks Corp. jumped 36 percent, the most in its 16-year history. The world's largest coffee-shop chain said October same- store sales in the U.S. suggest declines have ``bottomed out.''

Verizon added 18 percent to $29.67. The second-largest U.S. phone company added more subscribers than analysts estimated, driving profit up 31 percent.

PNC, BB&T Gain

PNC, whose pending acquisition of National City Corp. will make it the fifth-largest U.S. bank by deposits, gained 13 percent to $66.67. BB&T, the North Carolina-based lender, added 11 percent to $35.85.

The two regional banks are among at least 23 financial institutions invited to accept capital infusions as the Treasury rolls out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Stocks ``overshot to the downside given almost $5 trillion stimulus into the marketplace in terms of liquidity and capitalization done by governments around the world,'' said David Goerz, chief investment officer at Highmark Capital Management in San Francisco, which oversees $20 billion. ``I wouldn't want to be betting against them at this point.''

The cost of using options to insure against declines in stock prices fell for the first time in 10 weeks. The VIX, as the Chicago Board Options Exchange Volatility Index is known, slid 24 percent to 59.89, the biggest weekly drop since August 2007.

Yields on Treasury securities climbed as stock-market gains curbed demand for fixed-rate investments. The benchmark 10-year note's yield rose to 3.96 percent from 3.69 percent.

`Significant' Buyback

Apple Inc., the maker of Macintosh computers and the iPhone, rose 12 percent to $107.59. Sanford C. Bernstein & Co. said a ``significant'' share repurchase may boost earnings.

Insurance companies were the biggest decliners among the 43 S&P 500 stocks that slumped this week as investment losses threatened profits and credit ratings.

Hartford Financial Services Group Inc., the insurer that got an investment from Germany's Allianz SE this month, fell 58 percent to $10.32 after reporting its first unprofitable quarter in five years.

Cigna Corp., the Philadelphia-based health insurer, fell 32 percent to $16.30 after reporting a 53 percent profit decline because of shrinking health-plan membership and falling stock prices in its annuities business. Assurant Inc., the home insurer, retreated 31 percent to $25.48 after posting a third- quarter loss on investments and costs for two U.S. hurricanes.

$684 Billion Lost

S&P 500 companies are headed for their fifth straight quarter of declining profits. For the 360 that have reported third-quarter results, earnings fell 11 percent. Excluding financial institutions, profit rose 16 percent.

Industry and government reports next week are forecast to show manufacturing contracted at the fastest pace since 2001 while employers cut the most jobs since March 2003 in October, according to the median forecasts of economists in a Bloomberg survey. Americans go to the polls Nov. 4 to elect either Democrat Barack Obama or Republican John McCain to succeed President George W. Bush, a Republican.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.