Dow blows past 13,000 on hope for action in Europe
July 27, 2012 at 2:27 a.m.
NEW YORK (AP) - Faced with Facebook, Starbucks and Angela Merkel, the market chose to focus on Merkel.
For a second day, the U.S. stock market powered higher after European leaders, including German chancellor Merkel, pledged to protect the union of 17 countries that use the euro. The Dow Jones industrial average blew past 13,000, a key psychological marker that it hadn't hit since early May.
It wasn't that there weren't any troubling signs about the economy. In fact, they abounded: U.S. economic growth was anemic in the second quarter. A measure of consumer sentiment fell in July as people worried about their job prospects. And Facebook and Starbucks dropped sharply after reporting disappointing quarterly results.
But on this day, investors homed in on a couple of remarks coming from Europe.
Most notably, Merkel and French president Francois Hollande released a joint statement saying they were "determined to do everything to protect the eurozone." That followed a similar pledge the day before from Mario Draghi, the president of the European Central Bank.
Merkel's statement was closely watched because Germany will have to sign on if any plan to keep the euro countries together is to succeed. As one of the stronger countries, Germany usually foots the bill for bailing out the weaker ones.
For all the rejoicing, a longstanding roadblock remains: Strong countries like Germany want other European nations to agree to cut spending. Weaker countries like Greece are resisting. The statement from Merkel and Hollande made clear that individual countries aren't off the hook, but "must comply with their obligations" - meaning a showdown over spending cuts is still possible.
"Talk is cheap," said Michael Strauss, chief investment strategist and chief economist at the Commonfund investment firm in Connecticut. "While there's some euphoria over this, at the end of the day, is Spain going to still be in a recession? Yes. Is Greece still going to be in a recession? Yes. So I wouldn't get too carried away."
Others said they were heartened that Europe appeared to be fleshing out more of the details of its plans. Leaders recently agreed that Europe's bailout fund could give money directly to banks, rather than slowing down the process by going through a country's government. Investors also hope that Draghi's remarks mean that Europe's powerful central bank will buy the bonds of distressed countries like Spain and Italy, lowering their borrowing costs.
"In our estimate, this is the first real step in the right direction that Europe has taken in terms of concrete plans," said Mitch Schlesinger, chief investment officer of FBB Capital Partners in Maryland. "Everything to date has been very politically motivated and kicking the can down the road. These are things that actually make a difference."
Jim Millstein, CEO of the Washington, D.C., financial advisory firm Millstein & Co., said investors shouldn't be surprised if any rescue plan takes a long time. The eurozone countries currently function with no real unity on their fiscal policies, even though they use the same currency.
"They are engaged in a very difficult project, which is to transform a monetary union into a fiscal union, and that is a cumbersome process," Millstein said. "It takes longer than the markets might otherwise like."
But the markets liked what they heard Friday. The Dow obliterated the 13,000 mark, climbing 187.73 points to 13,075.66. In two days, it's climbed 400 points.
The Standard & Poor's 500 jumped 25.95 to 1,385.97. The Nasdaq composite index rose 64.84 to 2,958.09.
Bond trading was also a study in optimism. The yield on the benchmark 10-year Treasury note jumped to 1.54 percent from 1.44 percent the day before. That means investors are feeling more confident about the economy and more willing to put their money in the stock market instead of low-risk government bonds.
In other positive signs, the euro rose against the dollar, stock indexes moved higher in Europe - including a 4 percent leap in Spain's benchmark index - and borrowing costs fell for Italy and Spain.
But there were plenty of red flags for anyone looking for them. The government reported that the U.S. economy grew at an annual rate of just 1.5 percent in the second quarter, a paltry number that likely isn't enough to bring down the unemployment rate. The government also said consumers pulled back on their spending. The Thomson Reuters/University of Michigan index of consumer sentiment fell in July as people worried about job prospects.
Among other stocks making big moves:
- Expedia, the online travel company, jumped 20 percent after blowing past analysts' earnings estimates. A jump in hotel bookings offset a decline in airline ticket revenue. The stock surged $9.19 to $54.90.
- Starbucks fell 9 percent, losing $4.94 to $47.47. Investors were disappointed that the company cut its outlook for the current quarter, and is considering closing unprofitable stores in Europe.
- Facebook fell 12 percent, giving up $3.14 to $23.70. Investors were disappointed that the company, in its first quarterly report since going public, reported a slowdown in revenue growth. It has now lost nearly 38 percent of its value since its initial pricing at $38.