By Rita Nazareth
Oct. 22 (Bloomberg) -- U.S. stocks advanced for the first time in three days as better-than-estimated earnings at companies from Travelers Cos. to McDonald’s Corp. boosted speculation that the worst recession since the 1930s is over.
Travelers jumped 7.7 percent and McDonald’s climbed 2 percent to help lead the Dow Jones Industrial Average higher, while New York Times Co. and PNC Financial Services Group Inc. also rallied on better-than-estimated results. American Express Co. climbed 3.8 percent to a one-year high after Moody’s Investors Service said credit-card defaults declined.
“I do feel optimistic that profit growth is real and will spur a broader recovery,” said Jeffrey Davis, who oversees $4.6 billion as chief investment officer at Lee Munder Capital Group in Boston. “You have a ton of liquidity, economic fundamentals are in place and that should be supportive for stocks.”
The S&P 500 increased 1.1 percent to 1,092.91 at 4:10 p.m. in New York, recouping more than half of its retreat over the previous two days. The Dow rallied 131.95 points, or 1.3 percent, to 10,081.31. The Nasdaq Composite Index rose 0.7 percent to 2,165.29 as declines in EBay Inc. and Amgen Inc. limited gains.
Benchmark indexes retreated in early trading after a Labor Department report showed initial applications for jobless benefits rose to 531,000 last week, topping the average analyst estimate by 16,000. A separate report showed home prices unexpectedly fell, while the index of leading economic indicators advanced for a sixth straight month.
‘Forced Move’
The S&P 500 is trading at its highest valuation in five years after climbing 62 percent from a 12-year low in March as the government lent, spent or guaranteed $11.6 trillion to combat the recession. The index is valued at almost 21 times the reported operating profits of its companies, more than twice its price-to-earnings ratio on March 6.
“We’re setting up for a really good market in November and December, a year-end rally where you’re getting a forced move into the market by those that have lagged behind,” Steve Leuthold, whose Leuthold Core Investment Fund beat 95 percent of rivals in the past five years, told Bloomberg Television. Stocks will benefit from “capitulation on the part of people who have been cautious,” he said.
Leuthold, who manages $4 billion, reiterated his prediction from an October 1 interview that the S&P 500 will gain through year-end and may rise to 1,350 in 2010 as profits improve.
Dow Leaders
Travelers rallied 7.7 percent to $51.70, its biggest gain this year and the steepest advance in the Dow. The insurer boosted its dividend and said quarterly net income quadrupled to $935 million. Operating income, which excludes some investment results, was $1.61 a share, beating the $1.29 average estimate of analysts in a survey. Travelers benefited from a decrease in storms after hurricanes Ike, Gustav and Dolly contributed to $1 billion in catastrophe expenses in the year-earlier quarter.
Insurance companies in the S&P 500 added 3.9 percent as a group, the second biggest advance among 24 groups after banks, which rallied 4.7 percent.
McDonald’s rose 2 percent to $59.50. Earnings were $1.15 a share. The average analyst estimate in a Bloomberg survey was $1.11 a share. Sales at restaurants open at least 13 months increased 3.8 percent, the Oak Brook, Illinois-based company said in a statement. Analysts projected a rise of 2.9 percent.
AT&T Inc. added 0.6 percent to $26.10. Third-quarter profit excluding some items was 53 cents a share, beating the average analyst estimate by 3 cents.
New York Times Co. had the biggest gain in the S&P 500, surging 23 percent to a one-year high of $10.72. The publisher said third-quarter profit excluding some items rose to 16 cents a share after cutting wages and production costs. Analysts predicted a loss of 1 cent, on average.
Financials Jump
PNC Financial Services, Fifth Third Bancorp and SunTrust Banks Inc. said lending was becoming more profitable as they paid less on customers’ deposits and other borrowing costs declined.
PNC surged 13 percent to $50.65, its steepest advance since May, after the Pittsburgh-based bank said profit more than doubled in the third quarter and its net interest margin, the difference between what it charges for loans and pays on deposits, widened to 3.76 percent from 3.60 percent in the second quarter.
Fifth Third added 6.8 percent to $10.80, while SunTrust advanced 5.3 percent to $21.85.
Financial shares extended gains after Treasury Secretary Timothy Geithner said in a statement that his goal is for bailed-out firms to repay the government “as soon as possible.”
‘Road to Repair’
“We’re on the road to repair,” said Art Hogan, the New York-based chief market analyst at Jefferies & Co. “Geithner’s comments are very positive for the perception of investors about the financial industry. That’s giving support for banks and the overall market rally.”
American Express rose 3.8 percent to $36.44. U.S. credit- card defaults fell in September from a record high as five of the nation’s six biggest card lenders posted monthly declines, Moody’s said.
Profits have topped estimates at 79 percent of the companies in the S&P 500 that have released results, according to Bloomberg data. That would mark the highest proportion in data going back to 1993. Earnings fell for a ninth straight quarter in the July-September period, according to estimates compiled by Bloomberg, and are projected to return to growth in the final three months of the year.
Crude oil for December delivery fell 0.2 percent to $81.20 a barrel. Futures touched $82 yesterday, the highest since Oct. 14, 2008.
EBay, Amgen
EBay sank 4.2 percent to $23.97. The owner of the most- visited e-commerce Web site forecast fourth-quarter profit that missed some analysts’ estimates after shifting into faster growing, less-lucrative businesses.
Amgen, the world’s largest biotechnology company, dropped 4.3 percent to $56.85 on lower third-quarter sales.
Stocks in Europe and Asia retreated on speculation that China may consider withdrawing stimulus measures after economic growth accelerated. Europe’s Dow Jones Stoxx 600 Index slid 1.2 percent, while the MSCI Asia-Pacific Index lost 1.1 percent.
China’s economy expanded at the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession.
China Stimulus
The acceleration in growth spurred concerns policy makers may consider withdrawing fiscal and monetary measures in coming quarters. Gross domestic product rose 8.9 percent in the third quarter from a year earlier.
U.S. stocks dropped in the final hour of trading yesterday after analyst Dick Bove downgraded Wells Fargo & Co., erasing a rally spurred by better-than-estimated results at Morgan Stanley and Yahoo! Inc.
Treasuries fell for a second day, sending the yield on 10- year notes up four basis points to 3.43 percent, as the U.S. announced plans to sell a record $123 billion of notes and inflation-protected debt next week.
The S&P 500 may drop at least 7.5 percent based on a “bearish ascending wedge” pattern, according to Tom McNally, a money manager at Wilbanks, Smith & Thomas.
Drawing a so-called “bottom trend line” from the S&P 500’s 12-year low on March 9 and a “top trend line” from its close on May 8, at the time a four-month high, creates a nearly complete bearish ascending wedge, McNally said. The pattern usually signals stocks are about to retreat and hasn’t preceded a rally in at least five years, he said.
“If this one breaks, I think it’s going to be another bear rally where we’re going to go back to at least 1,000 or so,” McNally, who helps oversees $1.3 billion in Norfolk, Virginia, and allocates assets based on technical indicators, said in a telephone interview. “For me, I’m starting to lighten up on the equities in my account.”
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net
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