Stocks rallied sharply Monday to begin the final quarter of 2007, sending the Dow Jones industrial average to a record-closing high.
An absence of any bombshell in a third-quarter financial forecast by banking giant Citigroup comforted investors.
A fairly benign report on business conditions in the nation’s manufacturing sector, including market-friendly inflation data, prompted optimism that the summer’s credit crunch and housing slump will not prompt a recession but could nonetheless cause the Federal Reserve to cut interest rates again at the end of October.
The Dow rose 191.92 points, or 1.4 percent, to 14,087.55, topping the previous record closing high of 14,000.41 on July 19.
“People are looking for a recovery, and perhaps the Fed will be doing something to foster that,” said Peter Jankovskis, director of research at OakBrook Investments in Lisle.
Early in the day, Citigroup previewed its third-quarter results by saying profit would be down 60 percent in the period compared with the third quarter of 2006. The banking giant cited lower fees in its credit markets business, writedowns of loan commitments and increased costs in providing consumer credit.
But Citigroup Chief Executive Charles Prince forecast a return to a “normal earnings environment” in the current quarter. Citigroup stock rallied on the news, closing up $1.05, to $47.72.
“For all the moaning and groaning about the subprime [mortgage] market, it seemed to me to be a pretty small impact for a large player,” said Jankovskis.
Moreover, by specifying its definitive losses, Citigroup soothed investor fears, said James Herrick, head of equity trading at Robert W. Baird & Co. in Milwaukee.
“The market doesn’t like uncertainty,” he said.
“To hear Citigroup say it was going to have a bad quarter didn’t catch anybody by surprise, but the subsequent reaction [in Citigroup stock] did,” said Patrick O’Hare, manager of investor content for online investment research service Briefing.com in Chicago. “It created additional buying pressure in the financial sector.”
O’Hare called the session a stock market “melt-up.”
“The credit worries have subsided for the day,” Herrick said. The stock market likes to think the credit crunch impact “is a third-quarter issue” among financial stocks, he said. Indeed, some investors are playing “catch-up” in depressed areas of the market, such as financial services, he said.
Analysts said investors are growing broadly optimistic about third-quarter corporate financial reports, which will begin to emerge in a few days. Optimism that the credit crunch has not infected business broadly and economic growth remains on track.
“I don’t think there are many people forecasting a recession,” said Michael Lewis, president of Chicago-based economic consulting firm Free Market Inc. Among economic forecasters, “there are varying degrees of weakness and lengths of weakness, but none of them is that severe.”
Moreover, investors faced the historical likelihood of a year-end stock market rally emboldened by evidence that the summer sell-off has nearly been reversed.
The benchmark Standard & Poor’s 500 index, which briefly suffered a 10 percent decline in mid-August, finished just six points below its all-time high close of 1553 on July 19.
“What was lost has now been found,” said O’Hare.
In addition, the stock market has displayed considerable resilience. The Dow is up more than 13 percent this year, despite the round-trip in July, August and September.
“There has been a lot of things thrown at [the stock market], and it has held up extremely well,” said Jankovskis.
The first day of a quarter typically has an upbeat tone, said O’Hare, as investors review their results from the previous quarter and see buying opportunities in the coming three months.
In Monday’s session, nine of the 10 major economic sectors of the S&P 500 index advanced. The single loser was consumer staple stocks, which include food and drug stocks and retailers.
Shares of Walgreens dropped nearly 15 percent after the Deerfield-based drugstore chain posted disappointing quarterly results, hurt by higher costs and a profit squeeze from selling generic drugs.
As the third-quarter earnings reporting season unfolds, traders remained focused on daily economic reports, including sales data from shopping centers and auto dealers due Tuesday. On Friday, the government is scheduled to report figures for job growth and unemployment in September.
“The inflation picture looks ominous,” said Lewis.
Commodity prices overall continued to advance Monday, despite a downtick in crude oil futures.
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bbarnhart@tribune.com
