Wall Street stocks advanced on Wednesday as US retail sales rose unexpectedly, providing some reassurance that consumers may continue to spend in spite of the gloomy outlook for the economy.
Solid earnings from Applied Materials (NASDAQ:AMAT) boosted sentiment in technology stocks, which were also buoyed by reports that Yahoo is exploring an alliance with News Corp.
Oil services companies were a source of market strength as crude oil prices rose above $93 a barrel. However, recently popular defensive sectors, including healthcare and consumer staples, lagged behind as investors became less risk averse.
The S&P 500 closed up 1.4 per cent at 1,367.20, the Dow Jones Industrial Average rose 1.5 per cent to 12,552.24 and the Nasdaq Composite surged 2.3 per cent to 2,373.93 as oversold, large-cap, tech stocks attracted buyers.
Equities rallied after retail sales increased 0.3 per cent in January versus a consensus forecast of a 0.3 per cent drop. Strong sales of new cars and petrol contributed to the unexpected uptick but, with these two factors stripped out, retail sales were flat. Furniture stores and building materials were among the sectors registering a decline in sales
In spite of these caveats, the retail data were mostly welcomed by Wall Street, which feared that US consumers would rein in spending as house prices slumped and the outlook for the employment market darkened. But some analysts were less sanguine: "Although headline retail sales were above expectations in January, the details are weaker," John Ryding economist at Bear Stearns, said, noting downward revisions in previous months and the narrow sector breadth of January's gains.
After an initial surge, retail stocks fell back to relatively modest gains. Among the best performers was Jones Apparel (NYSE:JNY), which climbed 11 per cent to $17.15 after its quarterly results beat Wall Street estimates.
President Bush on Wednesday signed a $168bn economic stimulus bill which is set to provide 130m Americans with tax rebates. Although Wall Street expects retailers to benefit from the package, Citi Investment Research said the spending boost would be thinly spread, with any spending increase concentrated on low-margin items at discount and food retailers.
In spite of the more positive mood on Wednesday, volatility remained high. Standard & Poors said that its benchmark index had risen or fallen more than 1 per cent on 17 out of 28 trading days in 2008, the third most volatile start to a year on record after 1932 and 1933.
Such volatility was also in evidence on Tuesday when billionaire investor Warren Buffett said he was willing to assume the liability for up to $800bn in municipal bonds guaranteed by monoline bond insurers facing possible credit downgrades. Analysts said the plan would do little to solve bond insurers' real problem - the heavy losses they took selling insurance on structured credit securities that have turned sour. Ambac Financial rose 5.3 per cent to $9.37 on Wednesday.
Mortgage insurers have also struggled amid soaring home delinquency rates. MGIC Investment (NYSE:MTG) lost $1.5bn in the fourth quarter. Its shares fell 11.1 per cent to $12.61 after the group said it had hired an adviser to explore options for raising capital. Radian Group (NYSE:RDN), a rival mortgage insurer, fell 10 per cent to $7.33. Meanwhile, Morgan Stanley (AMEX:MWD) rose 1.2 per cent to $43.23 after it said it would cut 1,000 jobs in its residential mortgage division.
Computer hardware and semiconductor shares were given a welcome boost after Applied Materials, up 10.2 per cent at $19.91, beat forecasts with its quarterly results. The semiconductor equipment maker noted strong demand for its flat-panel display products.
Apple chalked up some of the best gains on Wednesday, rising 3.6 per cent to $129.40 as Bespoke Investment Group said Apple was among the top five stocks trading furthest below its 50-day moving average.
As part of Yahoo's efforts to fend off an unsolicited takeover approach by Microsoft the search company is in talks with News Corp about combining some of their web properties, according to reports. News Corp owns MySpace, the social networking site. Yahoo rose 1.1 per cent to $29.88.
Coca-Cola said fourth-quarter profit jumped a better-than-expected 79 per cent to $1.21bn, but its stock slipped 0.9 cent to $59.39.
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