U.S. Stocks Rise as Economic Optimism Overshadows Increase in Oil Prices

By Cecile Vannucci and Nikolaj Gammeltoft - Mar 5, 2011 12:01 PM GMT+0700

U.S. stocks rose this week, with a rebound in the final hour of trading yesterday preserving the advance, after improvements in employment and service industries overshadowed concern that oil’s surge will slow economic growth.

Equities pared their weekly gain yesterday as crude rose to a 29-month high of $104.42 a barrel. Pfizer Inc. (PFE) and Merck & Co. led advances in the Dow Jones Industrial Average, gaining at least 2.7 percent. Agilent Technologies Inc. (A) rose 10 percent, the most in the Standard & Poor’s 500 Index, after the maker of scientific-testing equipment boosted its long-term sales and margin forecasts. Motorola Mobility Holdings Inc. fell 13 percent on concern about competition from Apple Inc.’s iPad 2.

The S&P 500 rose 0.1 percent to 1,321.15 after losing 1.7 percent the prior week. The Dow climbed 39.43 points, or 0.3 percent, to 12,169.88. Oil futures advanced 6.7 percent, extending their advance since Feb. 11 to 22 percent.

“It’s a battle between the negative geopolitical environment versus the very strong economic fundamentals,” said Benjamin Pace, who helps oversee about $420 billion as the New York-based chief investment officer of Deutsche Bank Private Wealth Management. “The economic environment is very equity friendly. The current geopolitical environment and its impact on oil prices, not so much.”

Production Cut

The S&P 500 lost 0.7 percent yesterday as crude oil jumped after fighting in Libya cut crude production in the African country by as much as 1 million barrels a day, spurring concern that there will be a slowdown in U.S. consumer spending, which makes up about 70 percent of the world’s biggest economy. The stock index had surged 1.7 percent on March 3 for the biggest increase in three months, pushed up by reports showing claims for first-time jobless benefits decreased.

The S&P 500 has gained 5.1 percent this year, amid government stimulus measures, improving economic data and higher-than-estimated corporate earnings. Per-share profit topped estimates at 71 percent of the 470 companies in the S&P 500 that have reported results since Jan. 10, according to data compiled by Bloomberg.

“Oil is the ultimate wildcard in terms of being a drag on the market and economic growth,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $155 billion. “That can overshadow the modest yet measurable improvement in the economy which we now see being registered in an improving labor market.”

Jobless Rate Falls

The jobless rate unexpectedly declined to 8.9 percent, the lowest level since April 2009, and employers added 192,000 jobs in February, Labor Department figures showed yesterday. Applications for unemployment benefits fell by 20,000 to 368,000 in the week ended Feb. 26, the Labor Department report said on March 3. Economists forecast claims would rise to 395,000, according to the median estimate in a Bloomberg News survey. The total number of people receiving unemployment insurance fell to the lowest level since October 2008.

The Institute for Supply Management’s index of non- manufacturing businesses rose to 59.7, the highest level since August 2005, from 59.4 in January. Economists forecast the gauge would fall to 59.3, according to the median estimate in a Bloomberg News survey. A reading above 50 signals growth. The institute’s factory index rose to 61 in February, the highest since May 2004, from January’s 60.8, according to the median estimate in a Bloomberg News survey of economists.

The better-than-estimated data pushed the Citigroup Economic Surprise Index to its highest level ever yesterday, according to data compiled by Bloomberg.

Pfizer, Merck

Pfizer rallied 4.2 percent to $19.66 for the biggest gain in the Dow. At least four states are considering legislation backed by the world’s biggest drugmaker that would impede the efforts of Medicaid and private insurers to save money by widening the use of generic drugs. Merck, the second-biggest U.S. drugmaker, gained 2.7 percent to $33.06. Health-care companies rose the most among 10 industries in the S&P 500, climbing 2.4 percent.

Agilent Technologies rose 10 percent to $46.75, the biggest gain in the S&P 500. The world’s biggest maker of scientific- testing equipment increased its long-term sales and operating margin forecasts at a meeting with analysts, JPMorgan said in a note to clients.

JDS Uniphase Corp. (JDSU), the network-analysis company which bought Agilent’s network solutions test unit last year, also climbed 10 percent, ending the week at $27.37.

Energy Stocks

Higher oil prices drove energy shares in the S&P 500 to a 0.4 percent gain. The stocks have surged 34 percent since March 9, 2010 -- the one-year anniversary of the index’s slump to a 12-year low -- leading the S&P 500’s advance. Chevron Corp. (CVX), the second-largest U.S. oil company, climbed 1.6 percent $103.75 this week.

Financial stocks had the biggest decline in the S&P 500, dropping 1.6 percent. The KBW Bank Index (BKX) slumped 2.4 percent as 23 of its 24 stocks retreated.

Citigroup Inc. (C) dropped 3.4 percent to $4.54. The third- largest U.S. bank was cut to “neutral” from “buy” by analysts at Bank of America Corp., who also cut Goldman Sachs Group Inc. (GS) to “neutral” from “buy.” Goldman Sachs fell 2.5 percent to $161.

JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank, decreased the most in the Dow, losing 2.5 percent to $45.52.

Motorola Mobility slipped 13 percent to $26.65, the second- biggest decline in the S&P 500. The mobile-phone maker was cut to “neutral” from “outperform” by Cowen & Co. analyst Matthew Hoffman, who cited competition for the company’s Xoom tablet from Apple’s iPad 2, which will go on sale on March 11.

Hudson City Bancorp Inc. (HCBK) fell the most in the S&P 500, sinking 13 percent to $9.88. The largest U.S. bank to forgo a government bailout said regulators may require it to “reduce its level of interest-rate risk and funding concentration.” About 98 percent of its borrowed funds are structured putable borrowings, which may have to be replaced if interest rates rise significantly, Hudson City said. The bank said it would have to buy back about 26 percent of its borrowings in the next 12 months if interest rates jumped by 3 percentage points.

To contact the reporter on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.