Bank Stress Test Results Ease Worries, Boost Wall Street
Investors felt more confident putting their money into banks on the eve of a government report card on big financial companies.
Bank stocks pulled the market higher Wednesday as media reports trickled out that indicated balance sheets at major lenders might not be as frayed as some had feared.
The word came a day ahead of the formal release of results from government “stress tests” aimed at determining which banks need to raise more capital. Investors relieved to have assembled an initial scorecard scooped up shares of most banks, even those expected to have to come up with new money.
The Dow Jones industrial average jumped 100 points in heavy trading volume, while the technology-laden Nasdaq composite index posted a more modest gain.
“To me, this rally has been more a recognition that maybe the end of the world is not at hand,” said Philip S. Dow, managing director of equity strategy at RBC Wealth Management.
The news on banks and a surprise drop in a report on unemployment provided the latest shots of confidence to a market that has barreled higher in the past two months amid signs that the economy is stabilizing. Market indicators have surged more than 30 percent from the 12-year lows hit on March 9.
Financial stocks that had sent the market plunging from its peak in October 2007 led the advance again as worries about the government’s report on banks eased.
American Express Co., JPMorgan Chase & Co. and Bank of New York Mellon Corp. will not be asked to raise more capital when federal officials announce the test results Thursday afternoon, but Regions Financial Corp. will need to bolster its reserves, according to people briefed on the results. Those people requested anonymity because they were not authorized to discuss the tests.
Citigroup Inc. will need to raise about $5 billion, according to a government official who requested anonymity because he was not authorized to discuss the matter. Earlier news reports put that number closer to $10 billion.
Bank of America Corp. and Wells Fargo & Co. also will be asked to raise capital, people familiar with the matter said earlier this week.
The Dow rose 101.63, or 1.2 percent, to 8,512.28. The blue chips closed above the 8,500 mark for the first time since Jan. 9, leaving the Dow down only 3 percent for 2009.
The Standard & Poor’s 500 index rose 15.73, or 1.7 percent, to 919.53. The gains pushed the index higher for the year after a rally on Monday helped erase the last of its losses from 2009.
The Nasdaq rose 4.98, or 0.3 percent, to 1,759.10.
Some analysts said the jump in financial stocks was overdone and may have been due in part to investors covering short positions. Traders who sell a stock “short” by selling borrowed shares can be forced to step into the market if they made the wrong call, forcing share prices higher.
“People running back into banks now as if all their problems are solved seems to me to be a bit overzealous,” said Rick Bensignor, chief market strategist at Execution LCC. “It almost feels like euphoric buying.”
There has been much speculation about which of the nation’s 19 largest financial companies are most in need of more capital. Analysts expect about half of the banks will be asked to raise money.
Among banks not expected to have to raise money, AmEx rose 57 cents, or 2.2 percent, to $27.14, while JPMorgan rose $2.40, or 6.9 percent, to $37.22. Bank of New York Mellon rose $3.05, or 11.1 percent, to $30.46.
Banks being told to raise money gained ground as investors showed relief they weren’t being asked to come up with more. Citigroup rose 55 cents, or 16.6 percent, to $3.86, while Bank of America rose $1.85, or 17.1 percent, to $12.69. Wells Fargo rose $3.62, or 15.6 percent, to $26.84. Regions Financial rose 34 cents, or 6.2 percent, to $5.83.
The KBW Bank Index, which tracks 24 of the nation’s largest banks, jumped 11.5 percent. Financial stocks touched off the market’s recovery in March after big bank CEOs said business was improving.
Beyond the rally in financial stocks, a private-sector report on unemployment showed employers slashed far fewer jobs in April than in March. The ADP National Employment Report said private sector employment fell by 491,000 last month, a huge improvement from the 708,000 jobs lost in March.
Unemployment has been one of Wall Street’s biggest worries about the economy, and the ADP survey delivered a reassuring sign ahead of the Labor Department’s April jobs report due on Friday.
Many analysts including Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, remain cautious.
“Just because things aren’t getting worse, does that necessarily mean that things are going to get better?” he said. “I don’t think this is the beginning of a new bull market.”
In other trading, the Russell 2000 index of smaller companies rose 2.54, or 0.5 percent, to 505.09.
Two stocks rose for every one that fell on the New York Stock Exchange, where consolidated volume came to 8.3 billion shares compared with 6.6 billion shares traded Tuesday.
Oil jumped to its highest level of the year Wednesday after the government reported that unused crude being placed in storage slowed a bit last week. Light, sweet crude rose $2.50 to settle at $56.34 per barrel on the New York Mercantile Exchange.
The highest close since mid-November helped energy stocks like Occidental Petroleum Corp., which rose $4.11, or 6.8 percent, to $64.58. Devon Energy Corp. rose $6.53, or 12 percent, to $61.01.
Bonds were little changed, with the yield on the benchmark 10-year Treasury note at 3.16 percent versus 3.17 percent late Tuesday.
The dollar was mixed against other major currencies, while gold prices rose.
Overseas, Britain’s FTSE 100 rose 1.4 percent, Germany’s DAX index rose 0.6 percent, and France’s CAC-40 rose 1.8 percent. Markets in Japan were closed for a holiday.
5/6/2009 6:31 PM SARA LEPRO AP Business Writers NEW YORK