Wave of Optimism Sends Stocks Up
Tuesday, October 21, 2008
Stocks surged yesterday on indications that government efforts to thaw the credit markets are making some headway.
The Dow Jones industrial average closed up 4.67 percent, or 413.21 points, to 9265.43. It gained more than 100 points during the last hour of trading and was led higher by energy stocks as oil prices continued to rebound. The tech-heavy Nasdaq composite index was up 3.4 percent, or 58.74 points, to 1770.03, and the Standard & Poor's 500-stock index was up 4.77 percent, or 44.85 points, to 985.40.
Investors focused on signs that government efforts to stem the financial crisis, including direct cash injections into major banks and a coordinated global lowering of interest rates, could be working. All are aimed at thawing the credit markets and encouraging banks to lend to one another, other businesses and consumers.
A benchmark rate for loans between banks -- the London interbank offered rate, or Libor -- eased slightly yesterday, down to 4 percent from 4.4 percent on three-month loans. But it is still much higher than the 1.5 percent bank lending rate set by the Federal Reserve. In normal times, the two rates are closer to each other.
"People have been waiting to see if these things have an effect," said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research.
In another indication of investor confidence, the yield on one-month government bonds jumped from 0.13 percent to 0.6 percent. Government bonds traditionally are considered a safe haven during economic turbulence, and a higher yield indicates that traders are demanding more from their investments.
The markets were also cheered yesterday by Federal Reserve Chairman Ben S. Bernanke's support for another stimulus package from Congress. Speaking before the House Budget Committee about the financial crisis, Bernanke said a stimulus package might be appropriate given that the economy is not expected to recover for some time.
"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke said.
Democrats, including House Speaker Nancy Pelosi (Calif.), have touted the need for a second economic stimulus package, but it has received a cool reception from the Bush administration. A $168 billion stimulus package passed in February, which included checks of up to $600 per person, helped prop up consumer spending for several months this summer, but its impact has started to fade.
Economists continued to watch corporate earnings reports for evidence of how the financial crisis has affected companies' balance sheets. Two toy giants reported earnings yesterday: Hasbro beat expectations, while Mattel fell short. The companies were upbeat about their prospects for the rest of the year, including the crucial holiday shopping season, though analysts say a drop in consumer spending could make it tough.
"We are very pleased with our third quarter and year-to-date performance," Brian Goldner, Hasbro president and chief executive, said in a statement. "In a challenging environment, we delivered both revenue and earnings growth. As we look to the remainder of the year, we are well positioned with the richest and most diversified portfolio of brands in the industry."
Mattel fell 2 percent, to $14.16 a share, and Hasbro was down 4 percent, to $28.87 a share.
The optimism spread today to stock markets across the Pacific. Japan's benchmark Nikkei average rose nearly 4 percent in early trading, while stocks in Australia were up more than 3 percent.
Meanwhile, oil prices moved higher. After a three-month slide, crude oil prices were up 3.34 percent, or $2.40, to $74.25 a barrel. Prices have been dragged down by expectations that the financial crisis would dampen demand. But now the Organization of the Petroleum Exporting Countries is expected to announce this week that it will cut oil production.
The rebound helped energy shares. Exxon Mobil was up 10 percent, to $74.99 a share. Chevron was up 12 percent, to $69.61 a share.