The blue-chip benchmark achieved its latest milestone as gains in tech shares overcame weakness in financial issues
Well, it was only by 0.41 of a point, but it counts all the same. Stocks reached another historic milestone Thursday, as the Dow Jones industrial average finally closed above the 14,000 mark it had been flirting with all week--by the slimmest of margins.
All-time record highs by seven of the 30 Dow components, including Exxon Mobil (XOM), Microsoft (MSFT), IBM (IBM) and Hewlett-Packard (HPQ) helped the blue-chip benchmark push past 14,000, overcoming pressure on financial stocks that appeared tied to Federal Reserve Chairman Ben Bernanke's testimony on Capitol Hill about subprime issues, among other topics.
On Thursday, the Dow Jones industrial average ended 82.19 points, or 0.59%, higher at 14,000.41 after hovering on either side of the threshold throughout the day. The broader S&P 500 index was up 6.91 points, or 0.45%, to 1,553.08. The tech-heavy Nasdaq Composite index rose 20.55 points, or 0.76%, to 2,720.04.
Market gains were driven by major institutional investors switching allocations between individual stocks and sectors rather than by individual investors on Thursday, according to CNBC Business News.
There's little reason to doubt the market's upward momentum can be sustained, in view of favorable economic conditions and stronger-than-expected earnings for the second quarter, said Brian Gendreau, investment strategist at ING Investment Management in New York.
"What probably isn't priced in [to the rally] is that the U.S. economy is growing faster than people think," he said. Measuring economic growth on the income side rather than the production side reveals that the economy grew 0.7% faster in 2006 than is indicated by the GDP data, he said. The higher income figures help explain why federal tax receipts have been so strong and why the federal deficit has fallen despite tax cuts.
"There seems to be a lot of unmeasured economic strength out there. That shows up eventually in earnings," he added.
Still, some observers are saying the equity-market rally seems unsustainable over the long term unless the financial stocks, stumbling under headline concerns, start to participate, commentators on CNBC Business News said. The financial firms now account for 20% of the Standard & Poor's 500 index.
If financial stocks seem to be falling out of favor, it's not telling investors to be wary of the overall market but of rotation within portfolios away from value stocks--which had a good run--back toward growth stocks, which are likely to keep the rally going, said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston.
He sees the warnings about subprime contagion as overstated and said it's not the investment banks whose run has ended, but those mortgage units within the banks that were making money on interest-rate spreads.
In economic news Thursday, Bernanke responded to questions from members of the Senate Banking Committee about the extent of the subprime lending crisis. He said that while nothing is really wrong with structured credit products per se, the quality of some of the mortgage backed paper wasn't as good as first presumed. He acknowledged that there will be substantial losses associated with subprimes, with estimates ranging from about $50 billion to $100 billion.
As far as the Fed's main task to control inflation, he said in order to be convinced that long-term inflation was moderating, the Fed needs to see lower food and energy prices and slightly higher unemployment rates, which would ease upward pressure on wages.
The Fed's hawkish view on inflation was highlighted in minutes from the FOMC's June meeting released Thursday, which cited additional risks that could keep pressure on the Fed for further tightening, including elevated energy and commodity prices, weakness in the dollar and slower productivity growth.
Among other economic data out Thursday, initial jobless claims for the week ended July 14 fell 8,000 to 301,000, following a 12,000 drop for the week ended July 7. Action Economics attributes the decline over the last two weeks to auto-retooling distortions, which it expects to leave initial claims near 300,000 next week as well, before they rebound to near 315,000 by the end of the month.
The Conference Board's composite index of U.S. leading economic indicators unexpectedly fell 0.3% in June, reversing a revised 0.2% rise in May and continuing the slide seen in April. Half of the index's ten components declined, led by a 0.21% drop in building permits (-0.21%) and a 0.12% decline in jobless claims. The factory workweek increased by 0.12%, however. The index has been down in four of the last six months, though it still suggests a moderate pace of expansion.
The Philadelphia Federal Reserve Bank's factory activity index for the mid-Atlantic region dropped more than expected to 9.2 from June's stronger-than-expected reading of 18.0, led by a big falloff in new orders, with shipments substantially higher. The Philly Fed survey showed notable acceleration the second quarter, suggesting a turn in the inventory cycle from a trough in the January-February period, according to Action Economics.
In the energy markets Thursday, the WTI August crude contract climbed 87 cents to $75.92 per barrel after crude futures prices spiked to 11-month highs near $76 per barrel on production outages in Angola, likely supported by stronger-than-expected China GDP data released overnight. A record number of open interest positions, with speculators piling in to buy bets on higher prices, has helped boost crude prices above $75 a barrel in the past week.
Among stocks on the move Thursday, financial firms came under pressure as soon as Bernanke began his comments before the Senate, with subprime mortgage worries on people's minds. Newly public Blackstone Group (BX) dropped 3.8% to new lows on Bernanke's remarks, and Fortress Investment Group (FIG) was down 1.7%, after rebounding from the brink of one-year lows earlier in the day. Rather than the degree of damage wrought by bad loans, market concerns centered on questions about how banks and other financial firms will replace the growth that previously came from those mortgage products, said CNBC Business News.
Brokerage firm MF Global (MF) launched its IPO Thursday, putting more than 97 million shares on the block at $30 a share. It didn't take long for investors to realize the stock had been mispriced, as shares traded down to $27.55.
Sterling Financial (SLFI) shares leaped 67.4% after it agreed to be acquired by PNC Financial Services Group Inc. for $565 million in stock and cash, or about $19.00 per share. The stock had plummeted since the bank uncovered fraud in its Equipment Finance unit, which precipitated the ouster of the subsidiary's chief executive and five other high-level employees.
Bank of America (BAC) posted a better-than-expected profit of $1.28 a share for the second quarter, up from $1.19 a year ago, on 7.4% higher revenues, net of interest expense. The bank joined a growing list of financial institutions that say they are setting aside more money to cover potential bad loans as the subprime debacle runs its course.
Technical stocks were king with Clearwire (CLWR) soaring 34.4% after saying it was jointly developing the first nationwide broadband network with Sprint Nextel (S) using WiMAX, a new technology that will allow consumers to access the Web on cell phones and other devices at much faster speeds than Internet access from existing cellular services from rival providers.
Juniper Networks (JNPR) shares climbed 12.5% after the designer of secure Internet protocols reported a second-quarter profit of 20 cents a share vs. 18 cents a year ago, driven by a 17% rise in revenue. Baird upgraded the stock to outperform from neutral on acceleration of revenue in both its business units, new products in the pipeline and the likelihood of wider margins in 2008.
Avici Systems (AVCI) shares shot up 35.3% after posting earnings of 82 cents a share vs. 58 cents in the year-ago period. Net revenue grew 17% and the provider of high-speed data networking equipment boosted its 2007 revenue outlook to $110 million to $125 million, citing final orders received for its router products.
Honeywell International (HON) reported earnings of 78 cents a share vs. 63 cents a share in the second quarter of 2006, bolstered by a 8.1% increase in sales. The aerospace and industrial conglomerate upped its 2007 sales guidance to $33.9 billion and earnings view to $3.10 to $3.16 a share, and announced an additional $3 billion stock buyback, which is about 6% of its market cap. The stock was up about 0.7%.
European stock markets were trading higher on Thursday. In London, the FTSE 100 index rose 1.11% to 6,640.20. Germany's DAX index climbed 1.24% to 7,991.21. In Paris, the CAC 40 index was up 1.16% at 6,065.50.
Asian markets traded mostly higher on Wednesday. In Japan, the Nikkei index was up 0.56% to 18,116.57. In Hong Kong, the Hang Seng index rose 0.76% to 23,016.20. In China, the Shanghai Composite index fell 0.44% to 3,912.94.
Treasuries finished little changed in price Thursday. The10-year note ended unchanged at 95-29/32 for a yield of 5.03%. The 30-year bond edged up 03/32 to 94-12/32 for a yield of 5.12%.
The intraday range was relatively narrow, with prices falling early and gradually recovering throughout the day.
Initial jobless claims, leading indicators, and the FOMC minutes to the June policy meeting had little impact on the market, reports S&P MarketScope. The bond market appears to be in a choppy, non-trending environment that could continue in the coming days or weeks, before a new trend emerges, says S&P.