Stocks Leap as Fears Ebb
Investors Show Stomach for Risk on European Rate Cut, U.S. Accounting Rule Changes
APRIL 3, 2009
By E.S. BROWNING
online.wsj.com
A wave of stock buying swept across the globe, as upbeat economic news from China, an interest-rate cut in Europe and a change in U.S. accounting rules spurred new investor appetite for risk.
In London, the heads of the world's leading economies concluded their summit with agreement on extra support for the International Monetary Fund, tighter global regulation of hedge funds, and widespread expressions of optimism that the worst of the economic downturn might be over. President Barack Obama hailed the Group of 20 meeting as a "turning point in our pursuit of global economic recovery." But he cautioned, "There are no guarantees."
Investors weren't waiting for guarantees. They were grasping at any shred of evidence that the world's economy is improving, or at least getting less bad. Betting that a recovery will start later this year, they were buying oil futures, industrial commodities, technology stocks and junk bonds, investments they shunned just a few weeks ago. They were selling Treasury bonds, gold, the dollar and other safe-haven refuges.
The Dow Jones Industrial Average surged above 8000 during the day for the first time since February, though late-day selling pulled the Dow lower at the close. While plenty of skeptics remain, the blue chips still finished at their highest level since Feb. 9, up 216.48 points, or 2.79%, at 7978.08.
The advance began in Asia, where a report showed China's manufacturing sector growing again. Japanese stocks jumped 4.4% and in Hong Kong they were up 7.4%. Stocks in Tokyo rose 0.6% in midday trading Friday.
Gains were even stronger in Europe, as the European Central Bank cut its benchmark interest rate and indicated it is considering more aggressive steps to stimulate the economy. On top of that, the G-20 agreed on a series of measures, such as quadrupling lending power at the IMF, aimed at boosting global growth. German stocks jumped 6.1%, and French stocks rose 5.4%.
The G-20 leaders increased the financial capacity of the IMF to $1 trillion so the fund can better handle crises in troubled countries -- hoping to send a signal to markets that the fund had adequate resources to handle a further downturn in the economy. The group also committed itself to revamping regulation of systemically important financial institutions, including hedge funds, and kept open the possibility that the nations would boost fiscal spending further.
Additionally, the leaders said they intended to begin a broad crackdown on tax havens.
In the U.S., accounting standards were changed by the Financial Accounting Standards Board, a private group that sets U.S. standards. The changes relaxed rules on how banks value billions of dollars in troubled securities, helping them strengthen their balance sheets and lend more. While conservative accountants warned that this was hocus-pocus that would cause trouble later, optimists said it could further stimulate recovery.
The Dow industrials are up 20% in the past four calendar weeks. If the industrials don't give ground Friday, it will mark their strongest four-week gain since 1938. In all, the blue chips are up 21.9% since hitting a 12-year low on March 9, although they still are down 44% from their 2007 record finish.
Buying of technology stocks lifted the Nasdaq Composite Index up 3.3%. The index is now up 1.6% for the year.
"In the economy, we are seeing a host of statistics that suggest that things are at least a little bit better at the margin. Most of them are still showing signs of decline, but just not as fast as it was. That is usually the first sign of stabilization," said Bruce McCain, who helps oversee $22 billion as head of the investment strategy team at Cleveland's Key Private Bank, an arm of KeyCorp.
Among the recent data that have been, if not positive, at least better than expected, Mr. McCain cites: auto sales, pending home sales, manufacturing activity, durable-goods orders, retail sales, consumer spending, consumer confidence, existing-home sales, housing starts and permits for new-home construction. Mr. McCain's portfolio managers had been leaning heavily toward stable, defensive investments such as health-care stocks and Treasury bonds. Lately, they have been shifting money toward developing-country stocks and industrial commodities.
Investors broadly are buying volatile consumer-dependent stocks such as Home Depot Inc., General Motors Corp. and Citigroup Inc., which rose on Thursday, and selling more-stable stocks such as Johnson & Johnson, Pfizer Inc. and Altria Group Inc., all of which fell.
They are buying junk bonds and selling safer Treasury bonds. They are selling gold and the dollar, viewed as refuges in troubled times, and buying oil, copper and other industrial commodities. They are buying stocks of minerals-exporting countries such as Brazil and Australia, both of which were up strongly.
In another sign of risk appetite, one of the first protective programs set up by the Federal Reserve after the collapse of Bear Stearns Cos. last year received no bids at a regular auction. The program, in which banks exchange riskier, and less sellable, securities for Treasurys, helped give the firms much-needed financing, and ultimately cash, during the crisis. The lack of interest on Thursday was a sign to some that money is moving more freely around the system.
Plenty of investors still have reservations about all this risk taking, for fear that the economy will prove weaker than the optimists hope.
Although he is doing some buying, Mr. McCain still is limiting stocks in his average portfolio to just 60%, with 10% in cash and most of the rest in bonds. "There are pretty good odds that the market will sell off at some point" later this year, he says.
Gordon Fowler, who helps manage $16 billion as chief investment officer at Philadelphia money-management firm Glenmede Trust, is remaining conservative. He is holding clients' stock exposure below normal and exposure to high-grade corporate bonds above normal, and he isn't joining in the recent shift toward risky purchases.
"We are in for rough, volatile times," he says. Since the beginning of March, for example, the Dow has had seven triple-digit point gains and six triple-digit point losses.
With retirement savings way down, consumers are more likely to hoard their cash than spend it, Mr. Fowler says. That kind of retrenchment by consumers and companies is likely to hobble economic growth, he says. "We are just as likely to see a stock decline over the next month or so as an increase. It is quite possible that we will get into the 700s again" on the Standard & Poor's 500-stock index, which finished Thursday ahead 2.9% at 834.38.
Write to E.S. Browning at jim.browning@wsj.com
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