Subprime contagion? That's so yesterday, at least on Wall Street. Just two days after a big sell-off prompted by rating agency downgrades on billions in subprime-backed debt, stocks pushed into record territory Thursday. Investors' spirits were stirred by good news from some big retailers including Wal-Mart (WMT; +2.41%), Target (TGT; +6.77%), and J.C. Penney (JCP; +6.04%).
Other factors fueling the rise in equities: A report on the U.S. trade deficit that showed a likely to boost to second quarter growth and more M&A headlines, including a mega-deal in the mining sector.
On Thursday, the Dow Jones industrial average was up 283.86 points, or 2.09%, to 13,861.73. The broader S&P 500 index rose 28.94 points, or 1.91%, to 1,547.70. Both were new records, and Thursday was the biggest one-day jump in the Dow in more than four years.
The tech-heavy Nasdaq composite index moved up 49.94 points, or 1.88%, at 2,701.73, a six-and-a-half year high.
On the New York Stock Exchange, advancing stocks led decliners by a 24 to 9 ratio. On the Nasdaq exchange, the ratio was 22 to 9 positive.
The primary driver of this bull market is "vast and beyond belief" levels of M&A, buyout and stock buyback activity, says Rob Brown, chief investment officer of Genworth Financial Asset Management.
At the same time, consumer spending is strong and both earnings and the economy seem to be growing. "People are in the process of revising their expectations upward across the bases," Brown says.
Many seem to believe problems with housing and subprime mortgages are confined to one corner of the economy. A sell-off earlier in the week, attributed to subprime worries, may have been simply "a knee-jerk nervous reaction as we start the earnings season," says John Wilson, chief technical strategist at Morgan Keegan.
Among leading sectors, financials rebounded sharply from losses prompted by the rating-agency moves on subprime mortgage-backed issues earlier in the week, while metals and mining stocks were up sharply, followed by semiconductors and energy, reports Action Economics.
One other thing that may be cheering U.S. equity investors Thrusday was continued weakness in the U.S. dollar vs. the euro. Roger Volz, chief technical strategist for Swiss American Securities, thinks the lower buck will actually help the bottom lines of multinational corporations, and he believes that's one reason the Dow average has surged to record heights, according to S&P MarketScope. Big multinationals like American Express (AXP; +5.06%), Caterpillar (CAT; +2.34%), Exxon Mobil (XOM; +2.67%), Honeywell (HON; +2.89%), Merck (MRK; +3.82%), and 3M (MMM; +2.33%) were among the blue chip leaders Thursday.
In economic news Thursday, the U.S. trade deficit widened to $60 billion in May, from $58.7 billion in April. The deficit with China rose to $20 billion from $19.4 billion.
On the labor front, U.S. jobless claims fell 12,000 last week to 308,000.
June sales figures from major store chains helped push several retail sectors, including general merchandise, apparel and supercenters higher.
Earnings season is starting to heat up, with Yum! Brands and Genentech showing profits, but apparently not meeting investors' high expectations.
Oil prices ended the day barely changed. August WTI crude futures rose 7 cents to $72.63.
Retail sales, Michigan consumer sentiment and business inventories are on the economic calendar for this Friday.
Among stocks in the news on Thursday, Yum! Brands Inc. (YUM; -0.55%) reported earnings of 39 cents per share in the second quarter, vs. 34 cents a year ago and beating analysts' estimates by 3 cents a share. Revenue rose 8% to $2.37 billion.
Genentech Inc. (DNA; -0.74%) reported earnings of 70 cents per share, vs. 49 cents a year ago, and revenue up 37%.
Wal-Mart Stores reported U.S. same-store sales were 2.4% higher excluding fuel sales, and up 2.5% including fuel. Total sales were 9.4% higher, and the chain expects July same-store sales to be up 1 to 2%. Second quarter earnings should be within previous guidance, the company says.
However, Macy's Inc. (M; -2.87%) reported a 2.7% drop in same-store sales. The chain expects July same-store sales flat or down up to 3%. It cut second quarter earnings guidance by 15 cents, to a range of 20 to 30 cents per share.
Alcan Inc. (AL; +9.88%), the Canadian aluminum company, become the subject of a bidding war. Australian mining outfit Rio Tinto (RTP; -3.27%) made a $101-per-share bid for Alcan. The $38.1 billion deal represents a 32.8% premium to Alcoa's (AA; +6.74%) previous bid.
Motorola (MOT; +0.72%) cut its second quarter sales forecast and said it expects a 2 to 4 cents per share loss in the second quarter. Standard & Poor's downgraded the stock.
Abbott Laboratories (ABT; +1.03%) and General Electric (GE; +2.09%) broke off a deal for GE to buy two Abbott medical-diagnostic equipment units for $8.1 billion.
The U.S. rebound sparked a rally in European indexes Thursday. In London, the FTSE 100 index was up 1.25% to 6,697.7. In Paris, the CAC 40 index moved up 1.7% to 6,103.05. Germany's DAX index rose 1.96% to 8,053.43.
Asian markets were mixed. Japan's Nikkei 225 index was off 0.36% to 17,984.14. In Hong Kong, the Hang Seng index rose 0.89% to 22,809.02. In mainland China, Shanghai's benchmark index was up 1.3% to 3,915.99.
Bonds fell on Thursday. The 10-year note fell 10/32 to 95-06/32 for a yield of 5.13%; and the 30-year bond slid 15/32 to 92-30/32 for a yield of 5.22%. S&P says prices fell as money flowed back into equities "amid a swelling appetite for risk."