Wall Street rallies again as Europe worries ebb

The U.S. stock market keeps bouncing from its summer lows, sending a relatively upbeat message to the rest of the world: Wall Street doesn’t see the economic outlook justifying another big breakdown in share prices.

That view could yet prove dead wrong, but in recent days rallies in many battered foreign markets, particularly in Europe, suggest that pessimism abroad may be ebbing somewhat.

Many European markets posted their biggest gains of the year Tuesday on hope that governments would agree on a framework for staving off a deeper financial crisis on the continent.

The buying wave also spilled into U.S. trading, lifting the Dow Jones industrial average as much as 325 points before the rally faded in the final hour. The Dow closed up 146.83 points, or 1.3%, to 11,190.69, its third-straight advance.

The German market soared 5.3%, Swedish shares surged 6.2%, and the Spanish market jumped 4%.

In Germany, Europe’s richest economy, Chancellor Angela Merkel pledged again to support debt-ridden Greece and preserve the Eurozone. In Athens, the Greek parliament approved a reviled new property tax aimed at narrowing the government’s budget deficit — a move demanded by other Eurozone countries before they’ll shell out the next round of aid to keep Greece afloat.

After weeks of seeming to show a lack of urgency about their government-debt crisis and its increasingly toxic effect on the banking system, European leaders’ tone has become more serious over the last few days, some analysts say.

“They’re finally getting the fact that they have a problem and they have to address it,” said Phil Orlando, chief stock strategist at Federated Investors in New York.

Commodity prices, which have tumbled with stocks over the last few weeks, rose Tuesday on hopes that progress in containing Europe’s crisis would damp fears about a new global recession. U.S. crude oil futures jumped $4.21 to $84.45 a barrel. Gold rebounded $58.10 to $1,650.60 an ounce.

Dan McMahon, a veteran stock trader at Raymond James & Associates in New York, warned against reading too much into Tuesday’s rallies. He said some of the gains stemmed from “short covering” by traders who had borrowed stock and sold it, betting that prices would continue to slide in the near term. As stocks rose instead, short-sellers faced pressure to jump in and buy shares to replace what they borrowed.

“There’s not a lot of stock-picking and investing going on in this market,” McMahon said. Many of his clients, he said, were staying on the sidelines.

Some large money managers, however, were selling bonds and buying stocks as part of quarter-end portfolio-rebalancing strategies, analysts said. With bonds appreciating while stocks have sunk this quarter, rebalancing requires managers to pare their bond stakes while adding to stocks. The quarter ends Friday.

As bond prices fell, the yield on the bellwether 10-year Treasury note rose to 1.98%, up from 1.90% on Monday and the highest since Sept. 16. The yield had plunged as low as 1.72% on Thursday, a day after the Federal Reserve said it would shift its massive bond portfolio more toward longer-term securities and away from shorter-term issues in an attempt to pull long-term interest rates lower.

Late in the trading session Tuesday, U.S. stocks lost altitude after London’s Financial Times reported that some Eurozone countries were pressing for Greece’s private bondholders to take bigger haircuts on the debt as part of any new workout plan for Athens. That risks throwing yet another wrench into negotiations to keep Greece from melting down and taking the rest of Europe with it.

Also, analysts noted that Merkel faces broad opposition in Germany to a proposed expansion of Europe’s $600-billion rescue fund for troubled member states and their banks. Although the deal expanding the fund was reached in July, it must be ratified by each nation’s legislature. A vote by the German Parliament is set for Thursday.

Apart from the risks posed by Europe’s mess, stock market optimists say they’ve been encouraged that U.S. blue-chip share indexes have bounced each time they’ve neared their early-August lows in recent weeks. The Standard & Poor’s 500 index, for example, has held above its summer closing low of 1,119.46 reached Aug. 8 despite three severe sell-offs since then.

The S&P 500 rose 12.43 points, or 1.1%, to 1,175.38 on Tuesday.

Despite the wild volatility of the last few months, the Dow is down just 3.3% year to date, the S&P 500 is off 6.5%, and the Nasdaq composite has lost 4%.

By contrast, most major stock indexes in Europe, Asia and Latin America have sustained double-digit percentage declines this year. For example, Germany is down 18.6%, Hong Kong is down 21.3%, and Brazil is down 22.2%.

It may not feel like much consolation, but “we’ve been the outperformer this year,” Gail Dudack, head of Dudack Research Group in New York, said of U.S. equities.

The bullish view is that the world economy won’t fall into a new recession, and that U.S. share prices already reflect the slowdown in growth that has taken hold this year.

Even as the economy has sputtered, companies in the S&P 500 overall are expected to post 13.7% growth in operating earnings in the third quarter, according to analyst profit estimates tracked by Thomson Reuters.

If those estimates are accurate or low, companies’ quarterly results could provide new support for share prices in October. The flip side is that widespread earnings disappointments could be devastating for the market.

David Kelly, chief market strategist at JPMorgan Funds in New York, said he believed that the U.S. economy would continue to expand, albeit slowly, and that companies would continue to wring out profit gains.

“If you believe that, then stocks look cheap” relative to earnings, he said.

tom.petruno@latimes.com