Stocks Finish with Strong Gains
Stocks finished with broad gains Monday amid hopes that a war in Iraq will be short-lived. There's speculation that the U.S. and British military attack could start soon, as U.S. administration officials stated that today is the last chance for diplomacy with Iraq.
The Dow Jones industrial average jumped 282.2 points, or 3.59%, to 8,141.92. The broader Standard & Poor's 500-stock index gained 29.52 points, or 3.54%, to 862.79. S&P MarketScope noted the S&P 500 has broken out of its recent trading range as it posted its biggest gain this year and has gained 7.7% in the last four days.
The tech-laden Nasdaq composite index was up 51.94 points, or 3.88%, to 1,392.27, with semiconductor stocks leading the way. Some short-covering may have supported the major indexes.
"What we're seeing is signs of resolution -- the closer we get to resolving the uncertainty, the better," says Michael Farr, president of investment firm Farr, Miller & Washington. "I don't get the sense that the market is endorsing war, but the market always endorses certainty."
John Licata, senior market strategist at BrokerageAmerica, agrees. "The uncertainty of war has been lifted." he says, as many investors think President Bush will announce the U.S. will attack Iraq, with or without our allies. At the same time, many investors were buying so that they don't miss the next bull market, Licata says.
In the latest developments, war is looking more certain after the U.S. advised the U.N. to withdraw its inspectors from Baghdad, several nations closed their embassies, and some foreign journalists left Iraq today. Following an emergency U.N. meeting Monday morning, the U.S. said that Saddam Hussein must leave Iraq, and that we have reached "the moment of truth." President George Bush, who said over the weekend that he will warn the U.S. people before the war starts, will speak at 8:00 p.m. ET Monday night.
Though many investors believe a war would be quick, the market has not priced in a long Osama bid Laden type of search for Saddam Hussein and the effects of Iraq's oil fields being blown up, Farr says.
Besides the war headlines, investors will also keep an eye on Tuesday's meeting of the Federal Open Market Committee, the Fed's policy-setting arm. Most economists don't expect a rate cut, but some are expecting a shift in the Fed's risk assessment from balanced to one of economic weakness, especially in light the surprisingly large drop in nonfarm payrolls earlier this month, low consumer confidence, and the rise in oil prices.
"While the Fed is surely concerned about recent weakness in some economic data, the rise in energy prices, and the broader uncertainty of war, it is our view that the Fed wants 'more time for inspections' before taking action," wrote MMS International economist Rick MacDonald in his weekly market analysis report. Upcoming economic data -- particularly the next employment report-- for March and April should help to ease current concerns surrounding the economy, he says.
"The market will, however, be watching for a phrase indicating the Fed is 'closely monitoring' conditions, which could flag the potential for an inter-meeting rate cut," MacDonald says.
On the economic front, housing starts and completions will be reported on Tuesday. MMS expects housing starts to plunge 8.1% to a 1.7 million unit annual pace in February. While such a drop would make for a dramatic headline, the anticipated contraction in starts activity is largely a function of the weather during the month. This report, however, will have very little impact as the markets focus on the FOMC and the situation in Iraq, MMS says.
Among stocks in the news Monday, Pfizer (PFE ) and Pharmacia (PHA ) will be able to complete their merger now that the pharmaceutical companies reached an agreement with the U.S. Federal Trade Commission on all required divestitures.
Wal-Mart (WMT ) shares gained after the retailer says it still expects March same-store sales to show a percentage increase in the low-single digits. It expects same-store sales growth to be in the high-single digits for April.
Auto stocks rallied, despite news that JP Morgan slashed production estimates for major manufacturers. Also, Bank of America cut its price target for General Motors (GM ) from $28 to $26.
Treasury prices plunged Monday, while stocks and the dollar surged higher as it became clear that the window for diplomacy had essentially shut, says MMS International. Comments from U.S. officials after the Azores summit Sunday, including Secretary of State Powell, and news that President Bush would address the nation Monday night and give Saddam a 72-hour ultimatum, added to expectations that an attack was only days away. Traders re-priced for a swift, successful strike against Iraq and a recovery in the economy, MMS says.
European stock markets ended higher as U.S. markets advanced. In London, the Financial Times-Stock Exchange 100 index gained 120.5 points, or 3.35%, to 3,722.3, as investors braced for a U.S. and British invasion of Iraq now that diplomacy has run its course.
France's CAC 40 index added 91.72 points, or 3.35%, to 2,831.73. In Germany, the DAX index was up 83.93 points, or 3.49%, to 2,487.12. Earlier there was talk that the German economic picture remains dark, as the Bundesbank says the stock market slide hurts spending and that the economy might face more contraction.
In other news, the European Commission cut its economic growth forecast to about 1% from 1.8%, and called on central bankers to reduce interest rates in case a war against Iraq deals a further blow to consumer and business confidence, according to wire reports.
Asian markets finished lower Monday. In Tokyo, the Nikkei 225 index fell 131.05 points, or 1.64%, to 7,871.64, near a 20-year low, due to renewed fears about imminent war. In Hong Kong, the benchmark Hang Seng index lost 152.01 points, or 1.7%, to 8,804.16.