U.S. Stocks Rally for Third Week on Earnings, Improving Economic Reports

U.S. stocks rose for a third week, sending the Standard & Poor’s 500 Index to a two-year high, as stronger-than-estimated data on retail sales, manufacturing and housing boosted confidence in the economic recovery.

Kraft Foods Inc., Caterpillar Inc. and DuPont Co. advanced at least 2.5 percent to lead the gains in the Dow Jones Industrial Average. Oracle Corp. advanced 5.1 percent after the second-largest software maker forecast earnings that beat analysts’ estimates. Marshall & Ilsley Corp. soared 16 percent as Bank of Montreal agreed to buy the lender for $4.1 billion.

The S&P 500 rose 0.3 percent to 1,243.91, completing a three-week rally, the longest stretch since Nov. 5. The Dow added 81.59 points, or 0.7 percent, to 11,491.91.

“Optimism on the economy has turned the corner,” said Quincy Krosby, chief market strategist for Newark, New Jersey- based Prudential Financial Inc., which oversees $690 billion. “Corporate earnings are strong, and we expect profits to continue to be solid. That’s fueling investor confidence.”

The S&P 500 has risen 13 of the past 16 weeks, which last happened in 2004, according to Howard Silverblatt, S&P’s New York-based senior index analyst. It has risen 84 percent from a 12-year low in March 2009 as corporate profits beat estimates, the economy improved and the Federal Reserve bought assets to boost growth. The index failed this week to reach 1,251.70, which would mark the full recovery of the six-month 46 percent drop following Lehman Brothers Holdings Inc.’s 2008 collapse.

Picking Up Speed

The U.S. economy is picking up speed and may grow by 3 percent to 3.5 percent next year, former Federal Reserve Chairman Alan Greenspan said. The economy grew at annualized pace of 2.5 percent in the third quarter. Recent statistics on retail sales and falling unemployment claims suggest it is gaining ground.

“The U.S. economy unquestionably has some momentum,” he said in a Dec. 16 interview in Washington. “The fourth quarter looks good. The growth rate could be 3.5 percent or more” for the final quarter of this year.

Kraft, the world’s second-largest food company, rallied 3.8 percent to $31.93. Caterpillar, the world’s largest maker of construction and mining equipment, gained 3 percent to $92.59. DuPont, the third-biggest U.S. chemical maker, slid 2.6 percent to $49.86.

Oracle jumped 5.1 percent to $31.46. Profit for the current quarter was higher than analysts forecast on average, adding to evidence that Oracle benefiting from an acquisition-fueled expansion into computer hardware. Profit excluding certain expenses will be 48 cents to 50 cents a share. That tops the 47- cent average of estimates compiled by Bloomberg.

M&A

Marshall & Ilsley soared 16 percent to $6.85. Bank of Montreal agreed to pay 0.1257 of its own stock for each share of the Milwaukee, Wisconsin-based lender to expand its Chicago- based Harris Bank. The deal values M&I at $7.75 a share, 34 percent higher than Dec. 16 closing price of $5.79.

As Marshall & Ilsley gained, financial stocks in the S&P 500 lost 1.4 percent, the most among 10 groups, amid concern Europe’s debt crisis is worsening. Moody’s Investors Service yesterday cut Ireland’s credit rating by five levels yesterday, citing its declining financial strength and the cost of bailing out lenders. Separately, Moody’s placed six Greek banks on review for a potential downgrade, one day after it put the country’s Ba1 bond ratings on the watch list for a possible cut.

‘Bleeding’

“Most people think that the bleeding had stopped,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which has $3 billion in assets. “I disagree. We’ll probably see more bad news coming out of Europe. The market is too complacent at this point.”

The benchmark index for U.S. stock options fell to the lowest since April. The VIX, as the Chicago Board Options Exchange Volatility Index is known, dropped 8.5 percent to 16.11 this week. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from this year’s peak of 45.79 in May.

Best Buy Co. sank 18 percent to $34.27 for the biggest retreat in the S&P 500. The world’s largest consumer-electronics retailer reported third quarter earnings excluding some items of 54 cents a share, missing the average analyst estimate of 60 cents. Best Buy also forecast annual earnings of $3.40 a share at most. On average, the analysts surveyed by Bloomberg estimated profit of $3.59 a share.

Credit Card Companies

Visa Inc. declined 17 percent to $66.90, while MasterCard Inc. fell 13 percent to $221.26. The world’s two largest credit- card companies may face permanent damage to the fastest-growing part of their business after the Federal Reserve proposed rules that could cut debit-card transaction fees by 84 percent. “It is negative all around,” wrote Scott Valentin, an analyst at FBR Capital Markets, in a note to clients. “This significantly impacts the business model for the networks.”

Quarterly reports scheduled for next week include Adobe Systems Inc., the top maker of graphic-design software, and Nike Inc., the world’s largest maker of athletic shoes. Carnival Corp., the world’s biggest cruise-line operator; Walgreen Co., the largest U.S. drugstore chain; Micron Technology Inc., the largest U.S. maker of computer-memory chips; and ConAgra Foods Inc., the maker of Banquet and Healthy Choice dinners, are also due to report results.

Spending by U.S. consumers and businesses probably accelerated in November, a signal the economy was speeding up at the end of the year, economists forecast before reports this week.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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