Stock indexes soar above 2012 highs
NEW YORK -- U.S. stocks skyrocketed Thursday as investors react positively to the European Central Bank chief's remarks that there will be "no set limit" to a bond-buying program to reduce borrowing costs for heavily indebted eurozone countries.
The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index soared above 2012 highs in midday trading, although it's uncertain whether strong investor buying will continue the rest of the trading session.
In afternoon trading, the S&P 500 index, up 2%, had broken past levels not seen since May 2008. If the rally has staying power, the S&P 500 will close above 1,427, a level not seen in four and a half four years. The Dow was up 235 points, a 1.8% increase, while the Nasdaq composite index was up 2.1% and within 7 points of levels not seen since November 2000.
Investors face two potentially market-moving events the next few trading days. Friday, the government reports the unemployment rate and how many new jobs were created last month. Next week, Federal Reserve policy makers meet to decide whether the economy needs more help.
There's a double-edged sword over investors' heads. If the jobs created in August are more than consensus estimates of 150,000, investors would cheer. But the good economic news might convince the Fed to hold off on any other actions to boost growth, which would disappoint investors.
Doug Cote, chief market strategist at ING Investment Management, says the stock market rally has legs. He argues that investors had been overly bearish ahead of the ECB announcement. The plan detailed by ECB chief Mario Draghi backs up his July assertion that he will do whatever it takes to keep the eurozone intact, says Cote.
And a string of economic reports - from strong retail sales to jobs data - are far better than expected, Cote adds. Demand for stocks will likely increase as money managers who have been cautious and missing their market targets, will now try to play catch up.
Details of the ECB plan include the International Monetary Fund monitoring the central bank's unprecedented bond-buying plan aimed at lowering interest rates for eurozone nations in financial crisis. One small disappointment: The ECB announced it is leaving its benchmark interest rate at 0.75%; investors had been hoping for a quarter-point cut.
Stocks are also getting a lift from a government report showing that initial claims for unemployment benefits fell 12,000 to 365,000 for the week ended Sept. 1. And ADP, a paycheck processing firm, on Thursday said that 201,000 private-sector jobs were created in August.
Both reports suggest that hiring could improve in recent weeks although neither one consistently mirrors the government's monthly employment report.
"It was a double whammy," says Cote, referring to investors' bullish reaction to jobs data and the ECB committing to more aggressive action on the continent's financial crisis. After back-to-back good news on the employment front, "the ECB came in with the big bazooka. All told, you have to get into this market. This market is the real thing," Cote adds.
European stock markets were up sharply on Draghi's remarks. In London, the FTSE 100 closed up 121 points, or 2.1%, to 5,778.93. In Frankfurt, the DAX 30 finished the day up 193 points, 2.8%, to 7,158.11, and in Paris, the CAC 40 ended the day up 95 points, or 2.8%, to 3,500.50.
ECB president Mario Draghi on Thursday announced in a press conference that the central bank will buy short-term sovereign bonds with maturities of three years or less in an effort to push down interest rates, boost economic growth and stabilize financial markets in Europe.
The ECB is calling the program OMT, short for outright monetary transactions. Basically, countries that want ECB assistance would have to apply. However, the ECB says conditions will be attached to the program. Once the ECB starts buying sovereign bonds — with the hope of driving rates lower as well as providing countries with much-needed liquidity — it has the option of terminating the purchases if countries don't comply to conditions set.
Investors have been anxiously awaiting the ECB move as the economic conditions in Europe have deteriorated amid a deepening recession, sky-high sovereign debt loads and dangerously high interest rates in countries such as Spain and Italy, which are making it difficult for these countries to pay debts and keep their governments operating.
Flooding markets with liquidity has been a boon to stocks in the U.S. since the financial crisis. The Fed's bond-buying programs, dubbed quantitative easing, of which there were two, and Operation Twist, have been a key driver of the more than 100% gain for stocks since the March 2009 stock market low.