Stock indexes post gains after late rally

In a mirror image of Wednesday’s last-minute market sell-off, stock prices shot up in the final 15 minutes of trading Thursday despite a report showing that the third quarter was the worst for the U.S. economy since 2001.

The rally capped another volatile day for Wall Street. The Dow Jones industrial average jumped 275 points in early trading, sank briefly into negative territory and then seesawed before the final surge.

The Dow closed at 9,180.69, up 189.73 points, or 2.1%. The broader Standard & Poor’s 500 index closed at 954.09, up 24 points, or 2.6%, and the tech-laden Nasdaq composite rose 41.31 points, or 2.5%, to 1,698.52.

The advance was welcome relief after Wednesday’s late decline wiped out a gain of almost 300 points that followed the Federal Reserve’s decision to cut its key lending rate to 1%, its lowest level since 2004. The sell-off dashed hopes that the Dow could build on Tuesday’s 889-point rally and notch its first back-to-back gains since late September.

Thursday’s trading was dominated by the release of a preliminary report from the Commerce Department showing that the U.S. economy contracted in the third quarter as the global credit crisis damped consumer spending.

Investors initially appeared heartened that the 0.3% contraction in third-quarter U.S. economic growth -- the first decline since the fourth quarter of last year and the biggest drop since the third quarter of 2001 -- was less than the 0.5% drop economists had expected on average.

Consumer spending fell sharply in the quarter, dropping at a 3.1% annual rate -- the biggest decline since 1980 and the first decline of any size since 1991.

The report was seen by some as further evidence that the U.S. is headed for a protracted recession because consumer spending accounts for about two-thirds of the nation’s economic activity.

An announcement by American Express that it planned to cut 7,000 jobs added to the feeling that the effects of the credit crisis were continuing to ripple through the economy. But the company’s shares rose 3.4% for the day.

Analysts who predict a lengthy downturn said Thursday’s rally wasn’t justified by economic fundamentals.

“We could see a 4-percentage-point decline in GDP in the fourth quarter, and I think the market is just blind to that right now,” said John Lynch, chief market analyst for Evergreen Investments in Charlotte, N.C. He said he expected the U.S. economy to struggle through 2009.

Other analysts were more upbeat.

“The GDP report is yesterday’s news,” said Alan Skrainka, chief market strategist at Edward Jones in St. Louis. Noting that stock prices typically begin to recover before the economy does, Skrainka said that “people who wait for that good news are going to get left behind” when the market rebounds.

Better-than-expected third-quarter earnings reports from energy giant Exxon Mobil and consumer-product maker Colgate-Palmolive fed an upbeat mood in the market. Colgate-Palmolive shares jumped 7.1%.

But Exxon stock rose only 0.5%, held down by a drop in oil prices. After increasing almost $5 on Wednesday, crude futures fell $1.54 to $65.96 a barrel.

Visa, whose results can be a gauge of consumer spending, also reported better-than-forecast profit but lowered its earnings projection for the fourth quarter. The credit card issuer’s stock rose 7%.

There were signs of depth in Thursday’s rally. All 10 industry sectors of the S&P; 500 were in the black, and winners outnumbered losers by more than 3 to 1 on the New York Stock Exchange.

Meanwhile, there were further signs of thawing in global credit markets as measures of interest rates on loans between banks continued to inch down.

But the yield on short-term Treasury securities also fell, indicating higher demand for the safe securities and signaling that many investors were still shying away from stocks after suffering losses of 40% or more over the last year.

Overseas trading set the table for a strong opening on Wall Street. Key stock indexes rose 10% in Japan, 13% in Hong Kong, 1.2% in Britain and 1.3% in Germany.

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martin.zimm erman@latimes.com