US Stocks Close Month With Hefty Gains

US stocks close month with hefty gains

By Michael Mackenzie in New York

Published: July 31 2009 14:07
Last updated: July 31 2009 20:00



US equities settled mixed on Friday, but closed out July with solid gains as data on the economy suggested the vehemence of the recession was abating and expansion beckoned in the third quarter.
Among second-quarter earnings on Friday, Chevron reported a 71 per cent drop in profits. The stock rose 2.6 per cent to $69.47, pushing it up 1.5 per cent this week.

EDITOR’S CHOICE
Overview: Equities end month with a flourish - Jul-31On London: Rally cause for cheer and concern - Jul-31Man Group hurt by fears over US regulation - Jul-31Dollar pressured by US growth data - Jul-31Energy shares weigh on European bourses - Jul-31Oil dips as commodities consolidate - Jul-31Constellation Energy beat estimates and raised its earnings forecast for the full year. The power company’s shares dropped 1.1 per cent to $28.70.

Also exceeding its forecasts, Dominion Resources recorded a 52 per cent rise in net income but cut its outlook. The stock fell 2.1 per cent to $33.80.

After the closing bell on Thursday, Walt Disney reported a 26 per cent slide in third quarter earnings. The stock slid 4.2 per cent to $25.12 and analysts at JP Morgan downgraded Disney on Friday.

The S&P 500 gained 0.1 per cent to close at 987.48, having risen 0.7 per cent to a high of 993.18 earlier. That left the benchmark up 0.8 per cent for the week, and 7.4 per cent higher for July.

The Nasdaq Composite slipped in late trade on Friday, closing down 0.3 per cent at 1,978.50, for a weekly climb of 0.6 per cent and a monthly rise of 7.8 per cent.

Both the S&P and Nasdaq have rallied for each of the past five months and this week the main benchmarks set highs for the year.

The Dow Jones Industrial Average closed 0.2 per cent higher at 9,171.61 on Friday, a gain of 0.9 per cent this week. For July, blue chips jumped 8.6 per cent, the best month since a rise of 10.6 per cent in October 2002.

The rise in shares on Friday came after the advance read on US gross domestic product for the second quarter showed a contraction of 1 per cent. That was better than the forecast decline of 1.5 per cent.

Economists said this indicated that the recession was abating, clearing the way for a modest expansion during the third quarter.

That outlook has powered the equity market’s rally in recent weeks, but some worry that the market is due for a pullback. “There is a lot of money moving off the sidelines into the market, chasing performance,” said Michael Kastner, portfolio manager at SterlingStamos. “The stock market is getting ahead of itself.”

Caution over the economic outlook was provided by the GDP report which showed that consumer spending slipped 1.2 per cent during the second quarter, more than a forecast drop of 0.5 per cent.

“With consumers still flat on their backs, it will be a long time before the recovery gains any real momentum,” said Paul Ashworth, senior US economist at Capital Economics.

Meanwhile, downward revisions to past quarters also weighed on sentiment.

GDP for the first quarter is now seen to have fallen 6.4 per cent, more than an earlier decline of 5.5 per cent, while fourth quarter GDP is now pegged at a 1.9 per cent decline, versus a prior drop of 0.8 per cent. But investors are banking that companies, which have focused on drastic cost cutting this year, will benefit quickly from a pick-up in the economy.

“The reversal of the safe haven trade we have seen on Wall Street for the past three months is set to start playing out on Main Street,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “It’s not just the lean and mean companies, but also those consumers who have saved and delayed buying products. There is a lot of pent-up demand.”

From a trading perspective, the S&P 500 has room to rally beyond resistance just above 1,000 and possibly approach 1,100, according to some analysts

“The 1,100 area on the S&P marks fair value for the market’s move between 1994 and the top in 2007,” said Bill Strazzullo, chief market strategist at Bell Curve Trading. “These high-value trading areas are like magnets for the market.”

Among stocks in the news this week, shares in Yahoo dropped 18.1 per cent to $14.32 after investors knocked the company’s search engine tie-up with Microsoft.

General Electric rose 11.4 per cent to $13.40 this week after it indicated that its finance unit did not need additional capital and Goldman Sachs upgraded the stock.

Colgate-Palmolive’s profits beat estimates amid cost cutting, and the group maintained guidance for the rest of the year. The stock fell 3.5 per cent to $72.44 this week.

MasterCard rose 4.6 per cent to $194.03 after a 26.4 per cent rise in net income for the second quarter. Visa also beat estimates, but dipped 2.7 per cent to $65.46 this week. Dow Chemical recorded a loss of $486m for the quarter, due to charges stemming from its $16.5bn buy-out of Rohm & Haas and weak sales, but beat estimates and rose 4.9 per cent to $21.17 this week.

In deals, IBM said it would buy SPSS, a provider of predictive analytics software for $1.2bn or $50 a share. SPSS rose 41 per cent to $49.48 this week, while Big Blue gained 0.2 per cent to $117.93.

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