Global stock markets get a double boost

Reporting from Los Angeles and Washington —  In one day, two of the biggest fears tormenting global financial markets since summer have been swept to the sidelines, at least for now.

European leaders agreed on a bold plan to end their 2-year-old debt crisis, while a new report showed that the U.S. economy accelerated last quarter, dousing fears of another recession.

The result was a powerful rally in stocks that left the Dow Jones industrial average on track for its biggest monthly gain in 25 years.

If it sticks, the latest surge in share prices could help bolster business confidence about the economic outlook for 2012.

But it also may further aggravate small investors who have cashed out of the market in droves in recent months, pushed away by wild swings that have left many people frightened and disgusted.

What’s more, crucial challenges loom for the wobbly global economy. U.S. consumer confidence has crashed, raising doubts about holiday shopping. China’s growth is slowing. And markets could be riled again if congressional leaders fail to reach a deal by Nov. 23 to slash future budget deficits.

On Thursday, though, optimism carried the day. The Dow index ended up 339.51 points, or 2.9%, at 12,208.55, its highest level since July 28. In Europe, stocks jumped 5% or more in Germany, France and Italy, and the euro currency soared against the dollar.

The stage was set after a marathon negotiating session among European heads of state. After two years of being slow to respond to the government debt crisis that began in Greece and has since threatened the entire continent, the leaders surprised skeptics with their new plan of attack.

They agreed to slash Greece’s debt burden, while boosting the firepower of a previously created $600-billion rescue fund for struggling member states and banks.

A key goal: Provide guarantees to investors who buy bonds of Italy, to keep interest rates from spiraling higher and driving the Eurozone’s third-largest economy into ruin.

“It’s a strong signal that they recognize the need to be more aggressive to catch up with the crisis,” said Mohamed El-Erian, chief executive of money management giant Pimco in Newport Beach.

Like many other experts, he worries that implementing the program might prove far more difficult than constructing it. Many details still must be ironed out — including exactly how to bolster the finances of the rescue fund.

“If they don’t follow up quickly, people will use the markets’ rally to exit,” El-Erian warned.

But the plan helped damp perhaps the biggest worry dogging markets since mid-July: the risk of another global financial crisis, similar to what followed the crash of brokerage Lehman Bros. three years ago.

“I think there was a 50-50 chance of a systemic collapse of the [European] banking system,” said Jim Swanson, investment strategist at MFS Investment Management in Boston. “This takes that off the table.”

The global market plunge that began in late July had been triggered in part by fears that Europe’s banks would suffer massive losses on government bonds that they own, as doubts about debt repayment spread from Greece to Spain and Italy as well.

As part of the new rescue plan, major European banks are expected to forgive half of the bond debt they’re owed by Greece. They also face the tough task of raising more capital as a buffer against other loan losses. But the enlarged scope of the bailout fund — up to $1.4 trillion — also provides more protection for the banks.

Bank stocks across Europe and in the U.S. led the market’s advance Thursday. Shares of Societe Generale, one of France’s biggest lenders, soared about 23% in the session. On Wall Street, Bank of America Corp. jumped almost 7%.

While the risk of a new banking cataclysm fueled widespread selling in global markets in late July and early August, doubts about the U.S. economy added to the gloom.

Those concerns worsened after credit-rating firm Standard & Poor’s downgraded the nation’s bond rating on Aug. 5 to AA+ from AAA, citing a lack of progress in curbing federal budget deficits.

By early September some economists warned that the U.S. probably was skirting dangerously close to recession.

But the talk of double-dip recession proved overwrought. Buoyed by continued consumer spending and by strong business investment in equipment and software, the economy grew at a 2.5% real annualized pace in the three months ended Sept. 30, up from 1.3% in the second quarter, the government reported Thursday.

The new data from the Commerce Department showed slow but steady improvement in the economy throughout this year.

“This should almost eliminate people’s concerns about a double-dip recession,” said Gregory Hess, an economist and dean of the faculty at Claremont McKenna College. “It’s going to be slow growth, which means that we’re still susceptible to economic shocks, but with building momentum we should be gaining speed.”

Consumer spending, particularly on automobiles, helped boost growth. Personal consumption increased at an annual rate of 2.4% in the third quarter, compared with an increase of just 0.7% in the second quarter.

Also, the third quarter benefited in part from revived manufacturing that had been crimped by bottlenecks related to Japan’s earthquake and tsunami in March.

Many analysts worry that growth will fall off in the last three months of the year.

With income growth weak, the jobless rate at 9.1% and the housing market still severely depressed, “consumers face too many head winds at this point to keep up this type of spending. It’s unsustainable,” said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.

A key measure of U.S. consumer confidence plunged this month to its lowest level since March 2009, the depths of the last recession. That has economists nervous about holiday spending.

Meanwhile, the nation’s credit rating could be at risk of another downgrade if the so-called super committee of congressional negotiators fails to identify $1.5 trillion in future budget deficit cuts by Nov. 23.

The global economy faces its own head winds: Europe may already be in recession, and it now faces more austerity as strapped governments further trim spending. And China, a huge engine of global growth, is continuing to tighten credit to slow its economy as it fights rising inflation.

Growth for the U.S. in the near term may depend in part on whether stock markets continue to recover, experts said.

Rebounding share prices could give a psychological lift to businesses and to high-income earners, keeping them spending, said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco.

But the market’s resurgence also could encourage selling by individual investors who are tired of being whipsawed by extreme volatility. In August and September, investors pulled a net $41 billion from U.S. stock mutual funds, industry data show.

After diving 16% from July 21 to Oct. 3, the Dow index has rocketed 14.6% since. The Dow is on track to post its biggest one-month gain since January 1987.

Broader market indexes have suffered even wilder swings. The Russell 2,000 index of small-company stocks has rebounded a stunning 25.6% since Oct. 3.

“Unfortunately, too many investors were scared out of this market and missed the move up,” said Jeffrey Yale Rubin, director of research at market data firm Birinyi Associates in Westport, Conn.

Regulators have left markets at the mercy of short-term, computer-driven trading, Rubin said, echoing a common complaint.

“They don’t understand how that plays on the psychology of the individual investor,” he said. “People think, ‘This is just gambling.’”

tom.petruno@latimes.com

jim.puzzanghera@latimes.com