U.S. Stocks Rally as S&P 500 Jumps in Final Hour After Europe Bank Report

By Rita Nazareth - Oct 5, 2011 3:57 AM GMT+0700

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes of trading, amid speculation European Union officials are examining how to recapitalize the region’s banks.

Financial stocks in the Standard & Poor’s 500 Index jumped 4.1 percent as a group, reversing a 2.9 percent drop. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 4.1 percent. DuPont Co. and Hewlett-Packard Co. (HPQ) rallied more than 3.6 percent, pacing in companies most-tied to economic growth. AMR Corp. (AMR) surged 21 percent as analysts said the parent of American Airlines is unlikely to file for bankruptcy.

The S&P 500 rose 2.3 percent to 1,123.95 at 4 p.m. New York time. The index plunged 2.2 percent earlier, to a level that would mark more than a 20 percent drop from an April peak, the threshold of a bear market. The Dow Jones Industrial Average lost 153.41 points, or 1.4 percent, to 10,808.71 today.

“The European crisis has been the market driver,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “If Europe comes out with something to kick the can down the road, it buys them more time. We learned in 2008 how important the financial system is and how a ripple effect can occur.”

Stocks reversed losses in the final hour of trading after a report in the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. Belgian Prime Minister Yves Leterme said a “bad bank” for troubled assets will be set up for Dexia SA and will have government guarantees.

Due for Rally

Stocks were due for a rally after falling more than 5 percent in the previous two sessions, Paul Zemsky, the New York- based head of asset allocation for ING Investment Management, said. His firm oversees $550 billion. The S&P 500 is trading for 12.2 times earnings in the last 12 months, close to the lowest since March 2009.

“The market doesn’t go on a straight line either up or down,” Zemsky said in a telephone interview. “There’s no sign of recession in the U.S. and yet the market is pricing for one. So you’re going to have days when things pop up and you’re going to have bear market rallies.”

About 7 percent of S&P 500 stocks began the day trading above their average price in the last 200 days, according to data compiled by Bloomberg. That matched the proportion following the Aug. 8 rout for the lowest level in 30 months. The full index began today 14.1 percent below its 200-day moving average, the biggest gap since April 30, 2009.

Bear Markets

Concern governments may be running out of tools to keep the global economic slowdown from worsening has left equities from Brazil to Hong Kong and Frankfurt in bear markets. The declines have confounded bullish investors who speculated the recovery that began in March 2009 would boost stocks for a third year.

Global stocks fell earlier after some officials hinted that bondholders may have to take bigger losses on Greek debt than previously negotiated. Deutsche Bank AG scrapped its profit forecast and announced 500 job cuts and further writedowns of Greek bond holdings amid a “significant and unabated slowdown in client activity” in the wake of Europe’s debt crisis.

Equities briefly rose after Fed Chairman Bernanke said the central bank “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability. Bernanke made his remarks today in testimony to Congress’s Joint Economic Committee in Washington.

Banks Surge

Banks, brokerages and insurers led the rally as the S&P 500 Financials Index (S5FINL) jumped 6.5 percent between 3:18 p.m. and 4 p.m. New York time. The KBW Bank Index jumped 4.5 percent, after slumping 3.2 percent earlier. Bank of America added 4.2 percent to $5.76. JPMorgan rose 6.6 percent, the most in the Dow, to $30.26. Morgan Stanley (MS), owner of the biggest retail brokerage, rose 12 percent, the largest gain in the S&P 500.

The Morgan Stanley Cyclical Index of companies most-tied to the economy rallied 4.3 percent. The Dow Jones Transportation Average, a proxy for the economy, added 4.4 percent. DuPont increased 4.5 percent to $40.23. Hewlett-Packard advanced 3.7 percent to $23.02.

The Bloomberg U.S. Airlines Index of 10 companies added 6.3 percent. AMR gained 21 percent to $2.39, after falling 33 percent yesterday on concern the company may file for bankruptcy. Fort Worth, Texas-based AMR reiterated yesterday that Chapter 11 protection ‘‘is certainly not our goal or our preference’’ as the third-largest U.S. airline seeks more productivity in union agreements.

Apple Slumps

Apple Inc. (AAPL) dropped 3.6 percent to $361.23. The company, in its first product unveiling since Steve Jobs resigned as chief executive officer, introduced an iPhone with a stronger processor to help it vie with Google Inc.’s Android. The update of Apple’s best-selling product marks an early test for Tim Cook, CEO since Aug. 24, who hasn’t yet shown he can match his predecessor’s skills at product design and marketing.

‘‘There is some disappointment that only one new iPhone has been announced,” said Shaw Wu, an analyst at Birmingham, Alabama-based Sterne Agee.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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