Stocks End 3rd-Quarter Rally With A Whimper

Wall Street closed its best quarter since 1998 on Wednesday amid signs the economy is stabilizing, with investors continuing to dig themselves out of the deep sell-off that began last year.

The Dow Jones industrial average and Standard & Poor's 500-stock index both climbed about 15 percent during the third quarter after beginning their rebound the previous quarter. The Dow is now up 11 percent for the year but is still off more than 30 percent from its peak in October 2007. For the S&P 500, it was the best back-to-back quarterly performance since 1975. But that index also remains far below its high-water mark of two years ago.

Financial companies performed the best during the quarter. Bank of America's stock climbed 28 percent, for example, and traders even found reason to bid up American International Group, the insurance giant that was bailed out by the government last year. The New York insurer's stock was up about 90 percent in the third quarter.

Analysts had expected a pullback, or at least a break, over the summer, after a rally earlier this year where stocks recovered from their slide during the height of the financial crisis last year. Instead, investors grew increasingly confident that the economy was moving in the right direction. That confidence translated into small moves forward during the third quarter instead of eye-popping rallies, with stocks languishing for days some weeks before recouping ground and rising again.

The Dow, which closed at 9712.28 on Wednesday, is now close to breaking above 10,000 for the first time since October 2008. That level has held more psychological than technical significance since the Dow first reached it, in March 1999, but investors will be watching it closely, analysts said.

The question now is whether Wall Street can hold on to its gains. The third-quarter rally was fueled, in part, by signs that government efforts to prop up the economy were working, analysts said. But the Federal Reserve is already debating the best strategy for ending its aggressive interventions.

"The question is how long it [the rally] can be sustained and what happens when the government starts to unwind that stimulus," said Matt McCormick, banking analyst at Bahl & Gaynor Investment Counsel.

The bumpy nature of the recovery was illustrated by a mixed batch of economic data Wednesday that left stocks slightly in the red on the last day of the quarter. The Dow, an index of blue-chip stocks, fell 0.31 percent, or 29.92, while the broader S&P 500 was down 0.3 percent, or 3.53 points, to 1057.08. The tech-heavy Nasdaq composite index was flat, down 1.62 points, to 2122.42.

There was some relatively good news: The Commerce Department said that the economy shrank 0.7 percent during the second quarter, less than the previous estimate of 1 percent. That reaffirmed analysts' expectations that the economy began to grow again during the third quarter.

But that was offset by two unexpectedly negative reports that served as a reminder that the recovery could be slow. The ADP National Employment Report found that 254,000 private-sector jobs were lost last month. That was a bigger drop than expected, raising concerns about Friday's government unemployment report, when analysts expect the country to inch closer to a 10 percent jobless rate.

Also dragging down investors Wednesday was an unexpected decline in the Chicago Purchasing Manager's Index. The index, which measures business activity, fell to 46.1 for September from 50 in August. Analysts had expected the index to rise.

There is still plenty to worry about: Rising foreclosures loom over a tentative housing recovery, and consumer spending remains weak, analysts said. Also, many on Wall Street expect another brutal earnings season. S&P 500 companies are expected to report a 24.5 percent decline in profits during the third quarter, according to a Thomson Reuters forecast. That would be a slight improvement from the second quarter but still a reflection that corporate balance sheets are weak, analysts said.