February 1, 2008

Stocks bounce higher as bond woes ease

NEW YORK - Wall Street ended its worst January since 1990 with a huge advance Thursday after investors set aside worries about bond insurers and grew more optimistic that the Federal Reserve's interest rate cuts will indeed help lift the economy.

The Standard & Poor's 500 index, the market measure most closely followed by professional traders, lost 6.1 percent for the month, its biggest January drop since 1990, when it fell 6.88 percent. Meanwhile the Dow Jones industrials rose more than 200 points Thursday but still suffered their worst January in eight years.

The day's trading emerged as a microcosm of the entire month, with the Dow first falling more than 190 points, and then by late afternoon, soaring more than 250. It capped a January that saw frequent triple-digit moves in the blue chips as investors alternately anguished about the fallout from the housing and mortgage crisis and celebrated any news that indicated the damage might limited.

Still, the market ended the month with heavy losses, evidence of how dejected investors have become. The Fed's 1.25 percentage points in interest rate cuts, designed to stave off a recession, ultimately gave Wall Street some reassurance that the economy might soon show signs of recovery — although the market still gyrated after the latest 0.50 percentage point cut on Wednesday.

Bond insurer MBIA Inc. also mollified Wall Street Thursday when its chief executive, Gary Dunton, told investors he is confident the company can retain its crucial AAA credit rating and that MBIA will still be able to raise fresh capital.

The notion that bond insurers could perhaps avoid being felled by a rush of claims over swaths of bad debt offered solace for investors who have for months worried about the fallout from a sharp pullback in the housing market and the resulting souring mortgage debt.

"Today is really more of a relief rally because the Fed did what the Street wanted. They did what was expected of them and the MBIA news relieved the fears of some investors," said Ryan Detrick, strategist at Schaeffer's Investment Research in Cincinnati. "For once there's actually maybe some calm coming into Wall Street."

The Dow rose 207.53, or 1.67 percent, to 12,650.36.

For the month, the Dow lost 4.63 percent — its worst January since losing 4.84 percent at the start of 2000.

Broader stock indicators also jumped Thursday. The S&P 500 index rose 22.74, or 1.68 percent, to 1,378.55, and the Nasdaq composite index rose 40.86, or 1.74 percent, to 2,389.86.

The Russell 2000 index of smaller companies rose 17.81, or 2.56 percent, to 713.30.

Government bond prices rose. The 10-year Treasury note's yield, which moves opposite its price, fell to 3.59 percent from 3.63 percent late Wednesday.

The dollar was mixed against most major currencies, while gold prices rose.

Oil prices slid. Light, sweet crude for March delivery fell 58 cents to settle at $91.75 a barrel on the New York Mercantile Exchange.

The rebound in stocks came even as reports on sluggish consumer activity and higher jobless claims reflected weakness in the economy. However, along with the Fed's rate decision, Wall Street this week awaited the Labor Department's January report on payrolls and unemployment. Due Friday morning, the reading could shape sentiment because a strong job market is considered crucial to maintaining consumer spending, which accounts for more than two-thirds of U.S. economic activity.

MBIA's comments about its access to capital and the possibility of raising more seemed to dampen unease about recent moves by rating agencies relating to bond insurers. Moody's Investors Service and Standard & Poor's have said they are reviewing ratings on MBIA and other bond insurers.

MBIA, which had been down sharply after reporting a $2.3 billion fourth-quarter loss amid heavy write-downs, closed up $1.54, or 11 percent, to $15.50.

But MBIA's comments won't erase all of Wall Street's concerns about the credit markets.

"It seems to be a tug-of-war between 'Is this a systemic problem?' or 'Is this more of a cyclical problem that can be corrected with sort of the standard fare of monetary stimulus?'" said Kevin Gaughan, portfolio manager and equity strategist at Wells Capital Management in Milwaukee.

Economic readings could indicate how pervasive the troubles are.

On Thursday, the Commerce's Department's personal consumption and income report for December underscored the fact that the economy continued to weaken as 2007 ground to its end. Consumer spending in December — the year's peak shopping season — had its weakest performance since September 2006. The report's price index for personal consumption expenditures, a gauge of inflation closely monitored by the Fed, rose 0.2 percent in December from November levels. The department said personal incomes rose 0.5 percent last month.

Separately, the Labor Department reported a startling jump of 69,000 jobless claims in the latest week, pushing the total to 375,000. That the highest level since early October and the largest increase since September 2005. Thomson/IFR had forecast a gain of just 14,000 new claims.

Thursday's stock market rally, helped gains in beaten-down sectors such as financials and home builders, could relate in part to short sellers maneuvering positions on the final session of the month. Traders who sell a stock "short" bet its price will fall and are forced to step in and buy the stock should it begin to rise. That purchasing can exacerbate rallies.

Among financials, Citigroup Inc. rose 61 cents, or 2.2 percent, to $28.17, while homebuilder KB Home rose $2.32, or 9.2 percent, to $27.50.

Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume totaled 5.22 billion shares, compared with 4.64 billion shares seen Wednesday.

Overseas, Japan's Nikkei closed up 1.85 percent. In Europe, London's FTSE 100 closed up 0.73 percent, Frankfurt's DAX lost 0.34 percent and Paris' CAC 40 slipped 0.08 percent.

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