The Dow Jones industrial average on Wednesday surged to its biggest gain since June after encouraging reports on manufacturing and construction spending, jumping 194 points.
The broader market also advanced, with the Standard & Poor’s 500 index and the Nasdaq composite index recording their best gains since April and July, respectively.
Although the rally was welcome news after Tuesday’s losing session, when the Dow sank 105 points, some economists caution that prices may not continue in an upward direction.
On Friday, employment figures for September are scheduled to be released, and the numbers will give a good indication about how the economy is doing when it comes to creating jobs, said Tim O’Neill, chief economist for Harris Bank and its parent, the Bank of Montreal.
“Everything was up today, and there doesn’t seem to be any fundamental reason why,” he said. “You had a bit of a buying frenzy, and you may very well see some offsetting movement in the stock market tomorrow.”
There were not corresponding gains Wednesday in the bond market or in the value of the dollar, he noted. Those would have been signs that the push upward in stock prices is part of a larger trend, O’Neill said.
“I don’t think there’s any economic fundamentals logic behind today’s surge in equity markets,” he said.
The Dow jumped 194.14 points, or 2.1 percent, to 9469.20, its biggest one-day gain since June 16. The Nasdaq advanced 45.31, or 2.5 percent, to 1832.25, its largest increase since July 7. The S&P 500 rose 22.25, or 2.2 percent, to 1018.22, its best day since April 2.
The markets took their cue from two economic reports.
The Institute for Supply Management said its manufacturing index hit 53.7 in September, down slightly from 54.7 in August but still signifying that the sector was expanding.
In a second report, the Commerce Department said construction spending in August rose 0.2 percent from July, to a seasonally adjusted rate of $882.7 billion. It was the largest jump since January.
“All systems point to an economy that is recovering strongly,” said Brian Wesbury, chief economist for bond firm Griffin, Kubik, Stephens & Thompson Inc.
“The stock market has been very nervous, especially because so many of the Democratic candidates for president are just bashing the economy mercilessly. I think that has reduced consumer confidence and put some fear into the market that shouldn’t be there.
“The bottom line is that the economy is accelerating, and any long-term weakness in the stock market is highly unlikely.”
Some economists have suggested that much of the recent good economic news is the result of tax cuts and historically low interest rates. Many worry that those efforts bring only a short-term economic boost.
Wesbury said he sees signs, such as increases in auto sales, housing and manufacturing orders, that show real economic recovery is under way.
“The growth we’re seeing is sustainable,” he said. “This is not just the result of tax rebates.”
But not everyone is convinced that the economy has turned the corner, said Marc Borghans, senior vice president and portfolio specialist for LaSalle Bank.
“If I talk to investors and clients and portfolio managers, there is skepticism and doubt,” he said. “Which means there is plenty of reluctant attitude, there is plenty of money that is not committed, there is plenty of money locked up in money market accounts losing money on an inflation-adjusted basis.”
Job creation is needed to convince investors that the economy is turning around, said Borghans. He said he is “cautiously optimistic” that will happen by year’s end.
“Don’t get me wrong–this isn’t an exuberant recovery,” he said. “You just need that modest rebound in revenue-generating ability, and companies will be forced to expand once they realize that real economic growth will be higher than productivity growth. We’re entering that stage.”
The advance Wednesday was a broad one, with gainers outnumbering losers by nearly a 5-1 ratio on the New York Stock Exchange.
3M, a Dow component, rose $1.83, to $70.90, after it said it is on track to deliver earnings growth of 12 percent to 14 percent for 2004.
