The nation’s central bank and the European Central Bank sparked off fresh hopes of economic stimulus among investors that boosted benchmarks to their highest levels since early May. The Dow soared above the 13, 000 mark for the first time since May 7. Meanwhile, the S&P 500 touched its highest level since May 3.
The Dow Jones Industrial Average (:DJI) soared 187.73 points or 1.5% to close at 13,075.66. The Standard & Poor 500 (S&P 500) jumped a sharp 1.9% and finished Friday’s trading session at 1,385.97. The tech-laden Nasdaq Composite Index surged 64.84 points or 2.2% to end sufficiently higher at 2,958.09. The fear-gauge CBOE Volatility Index (:VIX) dropped 4.7% and settled at 16.70. Consolidated volumes on the New York Stock Exchange, the Nasdaq and the American Stock Exchange were 7.54 billion shares, well above the year-to-date daily average of 6.75 billion shares. Advancing stocks easily outpaced the decliners on the NYSE; as for 81% stocks that gained, only 16% stocks closed in the red.
The S&P 500 was at its highest point since May 3. Moreover, the two-day gain of the S&P 500 was the largest since December last year. Meanwhile, the Dow not only crossed the psychological barrier of 13, 000 for the first time since May 7 but settled higher. Friday’s gains also ensured that the blue-chip index would post its fifth triple-digit gain out of six sessions. The Dow’s robust rally since Wednesday through Friday resulted in the index’s best three-day gain this year. The Dow’s wait to settle above the 13, 000 mark was comparatively shorter this time around. The last time the Dow moved below that level in May 2008, it had to wait for almost four years to post such a high.
It is true that the Dow has only 30 components in its portfolio, but that includes many industry bellwethers and perhaps justifies the importance related to the index crossing a psychological mark. Associated Press noted that crossing the psychological level makes investors’ more confident about the economy which would spur them in to invest more.
Economic headlines were the major drivers behind the indices gains, especially in case of the Dow. However, individual components of the Dow also played a indices rally on Friday, as none of the 30 Dow components had to close in the red. The biggest gainers among the Dow components included Alcoa, Inc. (NYSE:AA), Caterpillar Inc. (NYSE:CAT), Cisco Systems, Inc. (NASDAQ:CSCO), Hewlett-Packard Company (NYSE:HPQ), JPMorgan Chase & Co. (NYSE:JPM), Merck & Co. Inc. (NYSE:MRK) and AT&T, Inc. (NYSE:T), which jumped 3.2%, 3.4%, 2.0%, 3.1%, 3.0%, 4.1% and 2.3%, respectively.
Coming to the headlines that actually guided the markets; a Bloomberg report confirmed that European Central Bank President Mario Draghi would meet Bundesbank President Jens Weidman and discuss ways to help the euro-zone survive the scare of lingering financial woes. ‘Several measures’ that Mario Draghi is to discuss include a bond-buyback program. Investors were once again hopeful of new economic stimulus being introduced to improve Europe’s flagging economic condition, and this sentiment actually helped lift the benchmarks. European shares ended higher and the ripples spread across the pond to the US.
Separately, a report earlier in the day by a French newspaper about ECB preparing to buy bonds of Italy and Spain further fuelled the positive momentum. According to the report in Le Monde (as translated in English): “The European Central Bank (:ECB) will not lead only the "great battle" to save the euro. She would prepare, according to our information, a concerted action with the states...While it will take another few days or even weeks to finalize the device in question, the ECB would prepare an operation coordinated with the states may limit the surge in interest rates of Spain , but also the Italy”.
The report also noted that French President Francois Hollande and German Chancellor Angela Merkel were to discuss these plans and further added: “The President of the ECB and key executives in the euro area have increased contacts in recent days. The negotiations were to continue in the day Friday. A telephone conversation between Francois Hollande and German Chancellor Angela Merkel , was, on this, not excluded in the afternoon.”
While the ripple effects spread to US and the markets enjoyed a steep upward rally, economic data was dissapointing. The Bureau of Economic Analysis released the Gross Domestic Product (GDP) "advance" estimate, where it noted: “Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter)”. This was marginally higher than consensus estimates that had predicted a growth of 1.4%. However, it was lower than the first quarter's rate of 2%.
Nonetheless, the economic reading did not have a negative impact, as investors’ hopes for economic stimulus received a boost. For a long time now investors have been hoping for the third round of quantitative easing (QE3), but their hopes have been dashed every time. Now, after a slew of relatively weaker economic reports and a dismal outlook for labor market, investors’ belief that the central bank might introduce economic measures gained strength.
Eventually, markets remained buoyant based on hopes on the domestic front and the news reports from across the Atlantic. Friday’s gains also guaranteed the benchmarks their weekly gains, and the Dow, S&P 500 and Nasdaq were up 2%, 1.7% and 1.1%, respectively.
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