Stocks jump on service industry, bank reports

[October 06, 2009]  NEW YORK (AP) -- The first growth in the service industry in a year and an upgrade of big banks pulled investors into the stock market after a two-week slide.

Major stock indicators rose jumped about 1 percent Monday, including the Dow Jones industrial average, which added 112 points.

The Institute for Supply Management said its service index rose to 50.9 in September from 48.4 in August. Analysts polled by Thomson Reuters had expected a reading of 50, the dividing line between growth and contraction. The index hadn't grown since August 2008.

Financial and energy stocks led the gains after Goldman Sachs raised its rating on large banks and the price of oil jumped.

The advance follows the market's first two-week slide since July, which came as reports on manufacturing and consumer sentiment fell short of expectations.

Stocks had fallen for seven of eight days, which likely brought buying interest from investors seeking bargains. The Dow lost 332 points, or 3.4 percent, in two weeks.

Monday's advance came as trading volume was light, which can skew price moves. Bigger tests of the market will arrive in the coming weeks when companies begin turning in earnings reports for the July-September quarter.

Thomas J. Lee, chief U.S. equity strategist at J.P. Morgan, said the improvement in the service index is encouraging because it could help boost confidence in the economy, a key element of a sustainable recovery.

"We really have to see the animal spirits kick in in the next six months, which is confidence in both businesses and consumers," he said.

According to preliminary calculations, the Dow rose 112.08, or 1.2 percent, to 9,599.75. The broader Standard & Poor's 500 index rose 15.25, or 1.5 percent, to 1,040.46, and the Nasdaq composite index rose 20.04, or 1 percent, to 2,068.15.

Lee said the market's two-week drop is a healthy sign of caution after stocks rose for seven months off of 12-year lows in March. He also said the mixed economic readings aren't surprising and don't mean the rally is over.

"We should be kind of looking for data to come in a little choppy because no recovery is going to be linear and smooth," he said.

A disappointing employment report Friday shook investors' confidence. The Labor Department said employers cut more jobs in September than in August, while economists had expected that cuts would decrease.

Investors could begin to get a better sense of the health of the economy on Wednesday when quarterly earnings reports start arriving. Aluminum maker and Dow component Alcoa Inc. kicks off earnings season, and investors will be looking for signs of growth to ease recent concerns about the strength of a rebound.

Adam Gould, senior portfolio manager at Direxion Funds in New York, said investors don't want to be out of the market if corporate earnings reports come in better than forecast for the third quarter as they did for the first and second quarters.

Stocks fell 7 percent from mid-June to mid-July before companies posted earnings that topped analysts' forecasts.

Gould said he doesn't expect the market will post massive gains before the end of the year because professionals who have ridden the surge since March 9 don't expect the gains can continue at such a pace. Others who missed the rally are going to be hesitant to get in now.

"I see people being relatively conservative between now and the end of the year. If you missed the rally you missed it," Gould said. "It's hard to buy stocks 45 percent off the lows."

Companies were able to mostly beat modest profit expectations in the second quarter primarily because of cost-cutting, including job cuts. Now traders will be looking for signs of growth in revenue to sustain improved earnings.

Financial stocks jumped after the Goldman upgrade. Wells Fargo & Co. rose $1.81, or 6.9 percent, to $28.09, while Bank of America Corp. rose 62 cents, or 3.8 percent, to $16.96.

Crude oil rose 46 cents to settle at $70.41 a barrel on the New York Mercantile Exchange as the dollar weakened. Commodities are priced in dollars, and a weak greenback makes them more appealing to foreign buyers. That lifted shares of energy and materials companies.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note was flat at 3.22 percent from late Friday.

The dollar fell against most other currencies, while gold prices rose.

Five stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.1 billion shares compared with 1.4 billion traded Friday.

The Russell 2000 index of smaller companies rose 10.91, or 1.9 percent, to 591.11.

Britain's FTSE 100 rose 0.7 percent, Germany's DAX index gained 0.8 percent, and France's CAC-40 advanced 0.7 percent. Japan's Nikkei stock average fell 0.6 percent.

[Associated Press; By STEPHEN BERNARD and TIM PARADIS]

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