Stocks Rally as Durable Goods Report Signals Rising Demand

Stocks Rally as Durable Goods Report Signals Rising Demand
By CHRISTINE HAUSER
Copyright by The New York Times
Published: September 24, 2010
http://www.nytimes.com/2010/09/25/business/25markets.html?hp


Indexes on Wall Street rose on Friday as the latest snapshot on the economy suggested that capital spending could help spur growth even as housing and consumer spending lag.

As American shares followed European markets higher, gold prices set a new record as investors weighed the chances that a market rally would continue.

Shares rose after a stronger-than-expected increase in orders for manufactured goods in August. The Commerce Department said orders for durable goods, fell 1.3 percent in August, slightly more than analysts’ predictions, which was after an upward revision to the previous month. But orders rose 2 percent after the volatile transportation component was excluded, which was twice the amount expected by economists polled by Thomson Reuters.

Orders for capital goods, including computers and communications equipment, rose 4.1 percent in August, after a 5.3 percent drop the previous month.

“The August report on the demand for long-lasting goods indicates that capital spending continues to be a positive contributor to overall economic growth in the U.S. even as consumer spending and housing demand raise concerns about the strength of the economic expansion,” Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, said.

Marc Chandler, the global head of currency strategy for Brown Brothers Harriman, wrote in a research note, that “The durable goods orders are consistent with the recent string of economic data suggesting that the U.S. economy might be stabilizing.”

Dan Greenhaus, the chief economic strategist with Miller, Tabak & Company, said the number “bodes well” for the gross domestic product reading for the third quarter.

But Kevin H. Giddis, the executive managing director and president of fixed-income capital markets at Morgan Keegan & Company, said that the expansion and investment would probably be month-to-month, rather than consistently higher.

“It means we are going to have a very choppy recovery, very slow and very steady,” Mr. Giddis said. “People are going to invest when they need to invest. It doesn’t predict a robust economy for the rest of the year.”

Alan B. Lancz, the president of Alan B. Lancz & Associates, said that improving economic data was one of several factors indicating to traders that the economy was improving. Some of the cash on the sidelines was being used for mergers and acquisitions, while uncertainty in the bond market was sending traders back into stocks, he said.

Another report on Friday showed that sales of new homes were unchanged in August at an annualized pace of 288,000. But the market took the Commerce Department report in stride.

In early afternoon trading, the Dow Jones industrial average rose 186.10 points, or 1.75 percent. The Standard & Poor’s 500-stock index was up 22.05, or 1.96 percent, while the Nasdaq rose 45.84, or 1.97 percent.

In London, the FTSE 100 index was up 51.40 points, or 0.93 percent, while the DAX in Frankfurt gained 113.59 points, or 1.87 percent. The CAC-40 in Paris was 71.87 points, or 1.94 percent higher.

European indexes got a lift from an unexpected rise in German business confidence. The Ifo institute’s confidence index rose to 106.8 points in September from 106.7 last month. The results were tempered somewhat by German businesses expecting more difficult conditions in the month ahead.

Gold reached a record $1,301.30 an ounce before slipping back.

Steve Blitz, a senior economist for Majestic Research, said that the new report on housing showed that the large supply of homes that need to be sold was a result of continued financial stress on consumers.

“There really is no way to sugar coat the reality that the for-sale new single family housing market remains depressed,” Mr. Blitz said. “It would be nice to point to some metric released today indicating that an upturn has begun.”

Commenting on the stock market, Tom di Galoma, head of United States rates trading at Guggenheim Securities, said that a number of traders were shifting back into equities, leaving the safer bonds behind. As a result, bond prices fell and the yield on the 10-year Treasury note rose to 2.59 percent from 2.55 percent late Thursday.

“I think on the margin the economic data has been a bit better,” Mr. di Galoma said. “Another reason is that funds generally are putting money to work by quarter end and also by year-end.”

Mr. di Galoma also attributed the trade to other factors, including the view that quantitative easing would have a positive impact on equities and speculation that the Republican Party would regain control of the House during the midterm elections next month.

“And that is being reflected in higher equity prices,” he said.