Financial Stocks Lead A Week-Ending Rally

U.S. stocks rallied yesterday, closing a wild week of trading on a high note as investors sold off commodities and rushed into stocks of financial firms.

The Dow Jones industrial average closed up 261 points, or 2.16 percent, at 12,361.32, nearly making up for Wednesday's loss. The Standard & Poor's 500-stock index, a broader measure, gained 31.09, or 2.39 percent, to close at 1329.51. The tech-heavy Nasdaq composite index gained 48.15, or 2.18 percent, to close at 2258.11.

Traders and analysts said the rebound signaled that Wall Street had begun to gain confidence in the Federal Reserve's response to the crisis in the credit markets. The strong showing helped stocks end the trading week in positive territory for the first time in a month. The markets will be closed today for Good Friday.

"I think the things that are giving it some short-term bounce right now is people believe the Federal Reserve is very engaged. That is a bit of clarity we hadn't seen before," said Robert Millen, portfolio manager of Jensen Investment Management in Portland, Ore.

Every sector gained except for stocks of companies that sell raw materials. Stocks of financial companies led the rally, with shares of investment banks rising sharply.

Lehman Brothers gained $6.42, or 15 percent, to close at $48.65 a share. Merrill Lynch gained $5.40, or 13.03 percent, to $46.85. Both reported better-than-expected earnings this week. Even the beleaguered investment firm Bear Stearns, which narrowly avoided bankruptcy this week, jumped 11 percent to close to $5.96.

Shares of Fannie Mae and Freddie Mac rose 11.7 percent and 9 percent respectively, yesterday. A government regulator loosened capital requirements for the federally chartered finance companies this week. The government's "deliberations suggest that Fannie and Freddie are important parts of recovery, and those stocks have responded in a very strong fashion," said Andy Brooks, vice president and head of U.S. equity trading at the Baltimore investment house T. Rowe Price.

Analyst Richard Bove of Punk, Ziegel & Co. in New York, declared the "the financial crisis is over" in a research note to investors yesterday, citing the Fed's actions to arrange the sale of Bear Stearns to J.P. Morgan Chase, offer loans to Wall Street investment banks and aggressively cut interest rates. But Bove added: "Let me be clear even though the financial crisis is over the problems facing the economy are not."

Analysts said the gains in the financial sector sent commodity prices tumbling.

The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.4 percent this week, according to Bloomberg, marking the largest decline since at least 1956. After hitting its record high last week, oil plummeted 7.7 percent to close at $101.84 a barrel yesterday. Gold, which also reached an all-time high last week, fell 3.6 percent to close at $910.08 an ounce.

"Commodities have had an exceptionally strong run," said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management of Atlanta. "What we are seeing now is that there is a little bit more confidence in the equity markets, and the improvement in the equity markets are probably pulling a little money away from commodities."

Many commodities investors are large institutional buyers that borrowed money to speculate. After some heavily indebted firms ran into financial trouble in recent months, investors are now trying to reduce their own risk by selling off commodities, analysts said.

"I would say that stocks are looking a little bit better, probably causing investors to book profits in commodities and move back to equities," Gayle said. "And then there is an overall de-leveraging, and that is quite common with commodity investments."

But yesterday's gain should not been seen as a sign that the economy has turned the corner, analysts said.

The Labor Department reported that 378,000 initial claims for jobless benefits were filed in the week ending March 15. That was up from 356,000 in the prior week.

Researcher Richard Drezen contributed to this report.