Dow soars on news of European rescue plan

5/11/2010

NEW YORK - The U.S. stock markets rallied yesterday, with the Dow Jones industrial average posting its biggest one-day percentage gain in more than a year, after the European Union announced a $1 trillion rescue package for Greece and other indebted European nations.

The package, unveiled early yesterday as Asian markets opened, helped reassure investors that the debt problems plaguing Greece will not quickly spread to Portugal, Spain, and other EU members beset by fiscal troubles.

That fear had rocked global markets in the past few weeks and played a role in the freakish but brief 1,000-point plunge in the Dow on Thursday. A less severe sell-off ensued Friday as investor uncertainty lingered.

Yesterday, the EU, the European Central Bank, and the International Monetary Fund helped restore investor confidence by expressing their willingness to invest in the debt of troubled European nations.

"This takes the panic out," said Paul Zemsky, head of asset allocation for ING Investment Management in New York. The various European governments "saw the abyss and they decided they didn't want to go over it."

Major stock markets soared in Europe, with the FTSE 100 in Britain and the DAX in Germany each rising more than 5 percent while the CAC 40 in France jumped 9.7 percent. The euro stabilized yesterday after slumping in recent weeks, and borrowing costs for Greece and Spain fell sharply.

A surge in U.S. stocks followed. The Dow rose 3.9 percent, or 404.71 points, to close at 10,785.14. That was the blue-chip average's largest single-day point and percentage gain since March, 2009, and all 30 companies listed on the Dow closed in positive territory. The tech-heavy Nasdaq composite index gained 4.8 percent, or 109.03 points, to 2374.67.

The Standard & Poor's 500-stock index, a broader measure of U.S. equity markets, jumped 4.4 percent to end the day at 1159.73, rising 48.85 points. It recouped 64 percent of losses from the five trading days last week, according to Sam Stovall, chief investment strategist at Standard & Poor's Equity Research.

Nearly 97 percent of the stocks in the S&P 500 rose yesterday, led by gains in the financial and industrial sectors, and in consumers' discretionary spending. Each increased more than 5 percent.

"A rising tide certainly lifted almost all boats," Mr. Stovall said.

The S&P 500's advance followed an 8.7 percent slide since April 23 and the biggest weekly retreat since the start of the bull market in March, 2009, as concern grew that European leaders weren't doing enough to halt a government debt crisis.

The rebound was reminiscent of the reaction by investors to the U.S. government's plan, in September, 2008, to buy up hundreds of billions of dollars worth of distressed mortgages. It was Washington's initial attempt to shore up banks that had been hobbled by the credit crisis, and it sent stock and credit markets sharply higher.

The decisive actions taken by European leaders marked a shift from the earlier days of the crisis, when they were widely criticized for moving too slowly to prop up the region.

Greece's near-bankruptcy and the fear of contagion had overshadowed improvement in the U.S. economy, where a string of companies have posted strong quarterly results just as the housing sector and jobs market are showing signs of recovery.

Yesterday, investors seemed to be shifting back to the fundamentals, said David Kelly, chief market strategist for J.P. Morgan Funds in New York.

"Minus Greece, the situation has significantly improved since the start of the quarter," said Mr. Kelly, who now estimates that operating earnings for the first quarter will exceed what analysts forecast at the start of earnings season.

However, the troubles that spooked world markets in the past few weeks are likely to resurface because the amount of debt coming due in eurozone economies during the next few years is substantial, said Mark Coffelt, chief investment officer at Empiric Funds.

"Maybe the next problem won't be as solvable as the Greeks,'•" he said. "At one point, it's going to be beyond the means of even well-run governments to bail out everyone."

The New York Times contributed to this report.