U.S. Stocks Advance as Fed Says It May Act to Safeguard Recovery

By Rita Nazareth - Nov 3, 2011 3:42 AM GMT+0700

U.S. stocks advanced, rebounding from a two-day drop in the Standard & Poor’s 500 Index, as the Federal Reserve said economic growth strengthened and it is prepared to take action if needed to safeguard the recovery.

Gauges of commodity and financial shares had the biggest gains in the S&P 500 among 10 industries, rising at least 2.2 percent. Bank of America Corp. (BAC), Chevron Corp. (CVX) and Alcoa Inc. (AA) rallied more than 2.4 percent. MasterCard Inc. (MA) jumped 7 percent as profit beat analysts’ estimates. MF Global Holdings Ltd. tumbled 79 percent in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.

The S&P 500 increased 1.6 percent to 1,237.90 as of 4 p.m. New York time. The benchmark gauge for American equities fell 5.2 percent over the previous two days. The Dow Jones Industrial Average added 178.08 points, or 1.5 percent, to 11,836.04 today.

“People are focused on two comments -- the economy has firmed and the Fed stands ready to take action,” Mark Bronzo, who helps manage $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “In addition, the fact that they are not taking action now makes you more comfortable that the economy is doing OK.”

The Federal Open Market Committee said “economic growth strengthened somewhat in the third quarter,” while also saying “significant downside risks” remain to the outlook. Stocks extended gains as Fed Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

Economic Forecast

Fed officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year. Forecasts for 2012 growth in U.S. gross domestic product from the five Fed Board members and 12 reserve bank presidents centered around 2.5 percent to 2.9 percent, measured from the fourth quarter of this year to the fourth quarter of next year. For this year, the central tendency forecast for U.S. growth was 1.6 percent to 1.7 percent.

“They are going with no rocking of the boat as long as the improvement continues,” Bruce McCain, who helps oversee about $20 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland, said in a telephone interview. “There’s a lot more concern at this point that the Fed would try too hard to juice up things and perhaps complicate an inflation picture that clearly is becoming better. The Fed wants to have as much powder dry as they can simply because if Europe blows up they want to have something in reserve.”

European Debt Crisis

Benchmark gauges rebounded after the biggest two-day drop in almost a month on concern Europe’s crisis was worsening. Greek Prime Minister George Papandreou triggered the latest upheaval in the two-year-long crisis by abruptly announcing on Oct. 31 a parliamentary confidence vote and his desire to hold a referendum on the rescue pact.

Papandreou, his hold on power weakening, was summoned to Cannes, France, for emergency talks on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out in a six-day crisis-management marathon. German Chancellor Angela Merkel said today that policy makers “must bring calm to the euro.”

The Morgan Stanley Cyclical Index climbed 1.8 percent on expectations the economy will be able to avoid a recession. The Dow Jones Transportation Average gained 1.3 percent. The KBW Bank Index increased 3.3 percent. Bank of America added 5 percent to $6.72. Alcoa jumped 3.2 percent to $10.70. Chevron rose 2.4 percent to $104.54.

MasterCard Rallies

MasterCard gained 7 percent to $357.66. Chief Executive Officer Ajay Banga, 51, is pushing to wrest market share from larger rival Visa Inc. New U.S. regulations on transaction fees charged to merchants for debit-card purchases also give retailers more say on how those transactions are routed, which may erode Visa’s dominance.

Phone stocks gained after the U.S. House voted to bar new state and local taxes on wireless services. Sprint Nextel Corp. (S) climbed 9.2 percent to $2.72. AT&T Inc. (T) increased 1.3 percent to $29.08.

AOL Inc. (AOL) rallied 13 percent to $15.02. The Internet company that’s struggling to halt a sales slide reported third-quarter earnings that exceeded analysts’ estimates by 65 percent.

MF Global, quoted under the symbol “MFGLQ,” tumbled 79 percent to 25 cents, in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.

No Trade

The stock hasn’t changed hands during a regular trading session since Oct. 28. NYSE Euronext suspended the stock before the New York Stock Exchange opened on Oct. 31. MF Global filed the eighth-largest U.S. bankruptcy this week after failing to find a buyer over the weekend. The futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt.

Whether the U.S. economy falls into a recession or expands more slowly matters little when it comes to stock-market strategy, according to Richard Bernstein, chief executive officer of Richard Bernstein Advisors LLC.

Playing defense has been more rewarding in the past six months than investing in shares of cyclical companies, which are more susceptible to changes in the pace of economic expansion. Makers of food, beverages, tobacco and other consumer staples are in the defensive category, along with health-care, telephone and utility stocks.

“Investors seem to spend too much time trying to ascertain the probability of a recession occurring,” Bernstein wrote in a report two days ago. A slowdown is enough to justify defensive strategies, favoring shares of companies whose sales and earnings growth is relatively stable, the report said.

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