A New Year's Rally for Stocks

Signs of increased activity in the manufacturing sector put investors in a buying mood to start 2003

Stocks closed near session highs Thursday, as a report of increased activity in the manufacturing sector stirred investors' hopes for an economic recovery. Advances by pharmaceutical, financial, and telecommunications shares led the major indexes. Thursday's gains marked a strong opening note for the 2003 stock market, which endured its worst year since 1974 in 2002.

"It's a masterpiece, but not a lot of people partcipated," says Larry Wachtel, market analyst at Prudential Securities. According to Wachtel, the moderate trading volume and sharp decline in the bond markets indicated "a lot of institutional asset swapping [and] pension fund cash flowing out of bonds into stocks."

The Dow Jones Industrial average finished ahead 265.89 points, or 3.19%, to 8,607.52. The broader Standard & Poor's 500-stock index climbed 29.21 points, or 3.32%, to 909.03. The tech-heavy Nasdaq composite index jumped 49.34 points, or 3.69%, to 1,384.85.

The major indexes spiked on the release of better-than-expected data from the Institute for Supply Management's (ISM) nationwide manufacturing survey for December. The index came in at 54.7, far better than economists had expected. Economists anticipated a rise from 49.2 in November to 50.3 in December. An index number of 50 or higher indicates expansion.

Additionally, the new orders component of the ISM survey rose to 63.3 from 49.9 in November, the biggest month-to-month increase since 1980 and the highest point total since March 2002. "In a market hungering for some kind of catalyst, it was the meat and drink," says Prudential's Wachtel.

Before the bell, however, investors received some negative news, as jobless claims for the week ended Dec. 28, 2002, rose more than expected. The Labor Dept. announced 403,000 jobless claims, up from a revised 390,000 the previous week, and well ahead of the expected 391,000 claims.

All but one of the 30 companies in the Dow posted gains Thursday. Among the biggest winners: semiconductor giant Intel (INTC ), which leapt more than 7% on the healthy manufacturing news, and entertainment company Walt Disney (DIS ), which rose 5.8% as Sanford Bernstein issued an unpgrade.

Shares in telecommunications companies were also higher Thursday, as the manufacturing data reflected an increase in orders for telecom gear. For instance, telecom equipment companies Ciena Corp. (CIEN )and JDS Uniphase (JDSU ) shot ahead 10% and 11%, respectively. Embattled telecoms Lucent (LU ) and Nortel (NT ) posted gains of 12% and 15% each, and Dow component SBC Communications (SBC ) moved ahead 6.6%.

Drug companies posted gains Thursday. After Tuesday's close, Abbott Laboratories (ABT ) announced approval for its new rheumatoid arthritis drug, sales of which Abbott pegs at $1 billion. However, early gains were mitigated after Abbott warned that the cost of launching the drug, named Humira, would cut into 2003 profits. The stock finished slightly up for the day.

Another pharmaceutical concern, Merck (MRK ) received FDA approval for a new allergy drug, Singulair. Merck shares were up 2.7%.

Retailers, beaten down by a disappointing holiday shopping season, got a boost Thursday. Goldman Sachs upgraded trendy apparel merchant American Eagle Outfitters (AEOS ), which jumped 10% Thursday.

Among financial companies, Citigroup (C ) shares rose 3.3% Thursday after the bank announced it would spend $72 million to take a 5% stake in China's Shanghai Pudong Development Bank.

In other financial sector news, pressure eased on Dow component J.P. Morgan Chase (JPM ) as the firm said it settled 11 insurers over losses from exposure to bankrupt energy trader Enron (ENRNQ ). According to the settlement, the insurance companies will pay about 60% of the $1 billion in surety bonds they wrote. J.P. Morgan Chase shares rose 6% Thursday.

On the commodities front, oil prices ticked higher early Thursday. A strike in Venezuela dented U.S. fuel supply in December, according to the American Petroleum Institute.

Treasury Market

U.S. Treasury prices plunged Thursday. The Institute of Supply Management's manufacturing survey was much better than expected and put pressure on Treasury prices. The benchmark 10-year note's yield rose to 4.05%.

World Markets

European markets finished solidly higher Thursday. In London, the Financial Times-Stock Exchange 100 index was up 69.10 points, or 1.75%, to 4,009.50. In France, the CAC 40 was up 131.11 points, or 4.28%, to 3,195.02. In Frankfurt, the DAX Index gained 212.41 points, or 7.34%, to 3,105.04.

In Japan, the Nikkei 225 index was closed for the New Year's holiday. The Nikkei, which will resume trading Jan. 6, dropped 135.10 points, or 1.55%, to close at 8,578.95 on Monday, its last trading day of 2002. In Hong Kong Thursday, the Hang Seng index gained 44.23 points, or 0.47%, to close at 9,365.52.

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