U.S. Stocks Rise Amid Optimism on Europe Efforts to Fight Crisis

U.S. stocks rose, sending the Dow Jones Industrial Average to the highest level since October, amid optimism that European leaders will announce further efforts to halt the debt crisis at a summit this week.

JPMorgan (JPM) Chase & Co. and Bank of America Corp. rose at least 1.9 percent to lead gains in the Dow. Financial shares increased the most among groups in the Standard & Poor’s 500 Index, rallying 1.2 percent after an earlier loss. Caterpillar Inc. (CAT) dropped 1.1 percent, pacing declines among industrial companies, while Peabody Energy Corp. fell 3.4 percent after Goldman Sachs Group Inc. cut its ratings on coal producers.

The S&P 500 climbed 0.2 percent to 1,261.01 at 4 p.m. New York time, after dropping as much as 1.1 percent earlier. The benchmark gauge for American equities advanced 1.1 percent over the previous two sessions. The Dow rose 46.24 points, or 0.4 percent, to 12,196.37.

“You can’t ignore the potential for another rally if Europe comes up with proposals that the market deems credible,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. “We might have not just a Santa Claus rally but a flat out melt-up.”

The S&P 500 has struggled to make any headway (SPX) this year, trading 0.3 percent higher for 2011, as the euro area’s debt crisis spread to the 17-nation currency’s larger economies. The index dropped 19 percent between April 29 and Oct. 3 before paring the decline to 7.5 percent. It has erased its 2011 loss six times since the beginning of October.

Banks Rally

Financial shares in the S&P 500 rallied 1.2 percent, erasing an earlier loss of 1.4 percent. JPMorgan climbed 2.3 percent, the most in the Dow, to $34. The biggest U.S. lender by assets “may or may not” buy back more stock, CEO Dimon wrote in an investor presentation. Bank of America added 1.9 percent to $5.89, reversing an earlier decline of 1.4 percent.

Energy stocks and utility companies lost the most among groups in the S&P 500, slipping 0.7 percent and 0.3 percent, respectively.

Coal producers declined after Goldman Sachs cut its view on the industry to “neutral” from “attractive,” citing proposed regulations from the Environmental Protection Agency. Peabody Energy fell 3.4 percent to $36.95. Arch Coal Inc. (ACI) slipped 3.4 percent to $15.77. Alpha Natural Resources Inc. (ANR) retreated 0.9 percent to $24.66.

Caterpillar, the world’s largest maker of construction and mining equipment, lost 1.1 percent to $94.89 for the biggest drop in the Dow.

First Solar Inc. (FSLR) advanced 4.1 percent to $47.99. Warren Buffett’s MidAmerican Energy Holdings unit agreed to buy the company’s $2 billion Topaz Solar Farm project in California. Financial terms weren’t disclosed.

SAIC, Talbots

SAIC Inc. (SAI) had the second-biggest advance in the S&P 500, rising 6.6 percent to $12.95. The defense contractor specializing in computer services reported third-quarter sales that beat analysts’ estimates.

Talbots Inc. (TLB) surged 70 percent to $2.65. The purveyor of women’s apparel said it would “evaluate” Sycamore Partners LP’s offer to buy the retailer for $212 million. The private- equity firm had said in a regulatory filing that it had offered to acquire all of the company’s shares for $3 apiece.

NYSE Euronext (NYX) fell 3.9 percent to $27.28. Raymond James Financial Inc. reduced its fourth-quarter earnings forecast for the owner of the New York Stock Exchange to 49 cents a share from 57 cents, citing lower trading volume.

Erasing a Loss

The S&P 500 erased an earlier loss in the final hour of trading today after Nikkei reported that the Group of 20 nations is considering a $600 billion International Monetary Fund lending program to halt Europe’s debt crisis. Stocks trimmed gains in the final minutes as CNBC said the IMF denied the report.

Pressure on Europe’s leaders to halt the spread of the region’s debt crisis at a summit this week intensified as the European Union had its AAA long-term rating put on “creditwatch negative” by S&P following a similar action on 15 of the 17 euro-area government. The action “does not have any impact on the sovereign credit ratings on non-Eurozone members of the European Union,” John Piecuch, director of communications at S&P, said in an e-mail.

“All this proves is the fact that we remain in a headline- driven environment,” Ryan Larson, Chicago-based head of U.S. equity trading at RBC Global Asset Management Inc., wrote in an e-mail.

ECB Actions

Three euro-area officials with knowledge of policy makers’ deliberations said the European Central Bank may announce a range of measures tomorrow to fight the crisis. Options for the ECB include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans, said the officials, who spoke on condition of anonymity. German Chancellor Angela Merkel and French President Nicolas Sarkozy will argue for rewriting European Union treaties to tighten control of national budgets at a summit meeting tomorrow and on Dec. 9.

“It’s difficult to get a bottom line outcome on the European situation,” Philip Dow, director of equity strategy at Minneapolis-based RBC Wealth Management which oversees about $160 billion, said in a telephone interview. “Macro concerns are driving the market,” he said. “It’s a challenging environment to manage money.”

Record Correlation

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

U.S. stocks are likely to form a “significant” bottom in 2012 before entering a new bull market, according to Bank of America Corp.

After a drop of as much as 18 percent, the S&P 500 might reach a low in the second quarter before climbing back to the upper part of its trading range near the 1,300 to 1,350 level by the end of 2012, Mary Ann Bartels, head of technical and market analysis at Bank of America’s Merrill Lynch unit, wrote in a note dated yesterday. A bull market is commonly defined as a 20 percent rally from the latest low.

Bartels cited the Decennial pattern, which examines the performance of every year within the decade. Years that ended in two, such as 1932, 1942, 1962, 1982 and 2002, featured market bottoms, she said.

“2012 could become the next year where a major market low is carved out to launch a new cyclical bull market,” wrote Bartels, who ranked third among analysts who study price charts in Institutional Investor’s 2010 survey.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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