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U.S. Stocks Rally for Second Week as China Bets Offset Europe

Caterpillar Inc. Logo
The Caterpillar Inc. logo is seen on a machine while contractors work on a road in Topeka, Indiana on Oct. 24, 2011. Photographer: Matthew Staver/Bloomberg

U.S. stocks rose for a second week, with benchmark indexes reaching five-month highs on Jan. 12, as bets China may act to spur economic growth outweighed concern about credit-rating cuts for some European nations.

The Standard & Poor’s 500 Index snapped a four-day rally on the last day of the week as France and Austria faced losing their AAA credit ratings at S&P and JPMorgan Chase & Co. posted a drop in profit. Alcoa Inc. jumped 7 percent in the week after reporting fourth-quarter sales that topped estimates. Caterpillar Inc. led gains in the Dow Jones Industrial Average as investors bought stocks most tied to economic growth.

The S&P 500 added 0.9 percent to 1,289.09 this week, extending its yearly gain to 2.5 percent. The Dow gained 62.14 points, or 0.5 percent, to 12,422.06 for the week. China’s Shanghai Composite Index rallied 3.8 percent in five days, halting a nine-week slide.

“The idea that China is very close to doing more, taking its foot further off the brake and maybe even putting it on the gas -- that’s an important part of the story,” Jeffrey Kleintop, the chief market strategist at LPL Financial Corp. in Boston, said in a telephone interview. The firm manages about $316 billion. “It’s the big growth story of the world. Optimism there is a big part of what helps drive the market.”

China’s import growth slowed to a two-year low in December, fueling bets on monetary easing. Imports rose 11.8 percent from a year before, less than all 21 estimates in a Bloomberg News survey of economists, a government report showed in Beijing.

Earnings Season

Investors also watched fourth-quarter results. Alcoa, the biggest U.S. aluminum producer and first company in the Dow to report earnings, posted fourth-quarter sales that rose 6 percent to $5.99 billion, topping the $5.7 billion estimate in a Bloomberg survey. Its shares added 7 percent to $9.80.

S&P 500 companies, which beat estimates in the previous 11 quarters, are forecast to report a 4.6 percent increase in per-share profit during the September-December period, according to projections compiled by Bloomberg, which would mark the slowest growth in more than two years.

“Even though there were some disappointments, the underlying trend in earnings was still strong,” Kleintop said. “There was some growth there, not as strong as it has been in the recent past, but suggesting we’ll get a decent up-year in stocks.”

Improving Economy

The S&P 500 has advanced this year amid improving economic reports after closing virtually unchanged in 2011. The U.S. Citigroup Economic Surprise Index, a gauge of how much reports are exceeding or missing economists’ estimates, rose to a 10-month high on Jan. 6.

Stocks ended their four-day winning streak on the last day of the week as France and Austria were stripped of its top credit rating by S&P and banks suspended talks with Greece over debt restructuring, the first blows this year to efforts aimed at stemming Europe’s fiscal turmoil. Germany, Europe’s biggest economy, retained its AAA rating in a review of euro-area countries’ credit grades by S&P.

Spain and Italy were also downgraded, while Finland, the Netherlands and Luxembourg also kept their AAA ratings. While the ratings actions weren’t confirmed by S&P until after close of U.S. exchanges, European officials had revealed some of them during the trading session.

JPMorgan Chase & Co. fell 2.5 percent on Jan. 13, paring gains for the week, after the bank reported a 23 percent drop in profit on lower investment-banking fees and revenue from trading stocks and bonds. The largest U.S. bank by assets rose 1.6 percent to $35.92 during for the week.

Cyclicals Lead

Investors purchased stocks of companies most tied to economic growth, with raw-material producers rallying 3.9 percent for the biggest advance out of 10 groups in the S&P 500. Financial companies had the second-biggest gain, increasing 3.1 percent, while industrials rose 2.6 percent. The Morgan Stanley Cyclical Index gained 3.8 percent and reached the highest level since August during the week.

Caterpillar, the world’s largest construction and mining-equipment maker, increased 7 percent to $102.48, leading gains in the Dow. Bank of America Corp., the second-largest bank by assets, rose 7 percent to $6.61.

“We think everybody got caught too defensive at the end of last year, meaning they need to start adding cyclicals and financials,” Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase & Co. in New York, said in an interview on Bloomberg Television’s “Street Smart” on Jan. 12. “That’s explaining why this market got this bid here.”

Sears Rallies

Sears Holdings Corp. rallied 15 percent, the second-biggest gain in the S&P 500, to $33.56. Chairman Edward Lampert, who controls the company along with his hedge fund, raised his personal stake in the retailer, according to regulatory filings.

BorgWarner Inc. climbed 13 percent, the biggest weekly gain in almost a year, to $73.70. The maker of turbochargers forecast profit this year will be $5.35 to $5.65 a share. That beat the $5.17 average estimate of 19 analysts tracked by Bloomberg.

First Solar Inc. rose 13 percent to $39.92. Solar stocks surged after the China National Energy Administration said it had plans to develop 3 gigawatts of solar capacity in 2012 and Vishal Shah, an analyst at Deutsche Bank AG, said the companies may rally on “encouraging” polysilicon pricing data over the next month.

Energy shares slipped 1.2 percent collectively for the biggest decline among 10 industries in the S&P 500 as oil fell to a three-week low of $98.70 a barrel after European officials said an embargo of Iranian crude imports may be postponed for six months. Chevron Corp. lost 2.1 percent to $106.09 after reporting fourth-quarter profit was “significantly below” third-quarter results because of shrinking fuel production.

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