A better-than-expected reading on the services sector of the economy and strong demand for Treasury’s first bond auction of the week bolstered the broad-based gains on Monday. The market rallied led by financial and energy stocks after Goldman Sachs raised its rating on large banks and the price of oil moved up.
On Monday, the Dow rose 112.08, or 1.2%, to 9,599.75, its first gain in four days. The broader Standard & Poor’s 500 index rose 15.25, or 1.5%, to 1,040.46, and the Nasdaq composite index rose 20.04, or 1%, to 2,068.15. On a sector-specific basis, financial were up 2.9%, basic material was up 2.8%, and oil and gas was up 2.2%.
Yesterday’s advance follows the market’s first back-to-back weekly declines since last July, which came as reports on manufacturing and consumer sentiment fell short of expectations. Certain traders noted that much of recent activity has revolved around positioning ahead of the earnings period due to start this week. On Monday, however, investors took heart in the ISM non-manufacturing report, which had its best showing since May 2008, as well as a Goldman Sachs’ (NYSE:GS) upgrade of large-cap banks, and a successful Treasury auction of 10-year paper. The slide of equities over the past two weeks was reversed as bargain hunters again stepped in to support the rally, as has been the case over the past seven months.
Market breadth was positive on the NYSE as advancing shares beat declining ones by a five-to-one margin. Twenty-four of the DJIA’s thirty components closed higher; 401 of the S&P500 stocks ended up; and 83 of the NASDAQ 100 finished higher at the close of the day. Volume was modest, with only 1.12 billion shares exchanged on the NYSE. However, the element of caution noted last week lifted somewhat, as the CBOE Vix, “fear factor” index, dropped 6.4% to 26.84.
Goldman Sachs (NYSE:GS) added Wells Fargo (NYSE:WFC) and Capital One Financial (NYSE:COF) to its Conviction Buy List as the firm upgraded the large-cap banking sector to “attractive” from “neutral,” noting the companies’ relative appeal based upon earnings potential. Subsequently, DJIA shares JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) gained 4.6% and 3.8%, respectively, with Wells Fargo (NYSE:WFC) closing 6.9% higher. Goldman (NYSE:GS) shares also responded well, up 3.8%, following a report which indicated the firm will be due for a $1 billion payment, if CIT Group (NYSE:CIT) were to file for bankruptcy.
As investors regained their confidence to hold riskier asset classes, the dollar resumed its slide, down 0.5% against a basket of currencies, while gold prices rose to their highest level in over a week, up 1.3% to $1017.80. Crude prices also moved up by 46 cents to $70.41. While eliciting a string of denials, the UK newspaper “The Independent” reported that Gulf States have been holding secret talks to replace the greenback as the denomination for oil prices with a basket of other currencies. While this is not expected to occur for nine or more years, the story sent the dollar lower.
After last week’s run of disappointing economic news, Monday’s report of the return of growth within the key services sector was welcome. The ISM gauge of service sector activity moved up from neutral, which was unexpected, into positive mode, at 50.9 in September from 48.4 in August. The report was the best since May 2008, and indicated expansion after 11 consecutive months of decline.
Today’s news brought with it a report of the first member of G-20 nation to initiate central bank tightening with its 0.25% interest rate increase to 3.25%. However, New York Fed President Dudley cautioned that a round of US deflation is possible due to slack in the economy.
Corporate specific information appeared to be brighter. Caterpillar (NYSE:CAT) reported plans to raise prices globally by 2% in 2010, due to “current industrial factors and current and expected general economic conditions.” The firm forecast global growth of 2.2% next year after a 2.2% drop in 2009. And while Alcoa (NYSE:AA) is expected to reveal another loss, there is a growing sense of the potential for upside earnings surprises. According to Credit Suisse (NYSE:CS) strategists, analysts typically underestimate upside earnings at this stage of a recovery.
The day’s calendar is relatively light, with little anticipated market-moving potential. Earnings are slated from Yum Brands (NYSE:YUM) and Pepsi Bottling (NYSE:PBG).
