Wall Street began the week with a strong start Monday, as better-than-expected profits at Citigroup Inc. and a healthy increase in consumer spending renewed investors’ optimism about the economy.
Earnings reports begin arriving at a steady clip this week, giving investors fresh indications about companies and the overall economy. This week nearly half the 30 Dow component companies report results.
While investors have been girding for a slowdown in growth of corporate profits, they are hoping consumer spending will remain robust. The Commerce Department on Monday reported that consumers spent strongly last month, sending retail sales up by about 0.7 percent. The figure was close to what analysts predicted, and up from a revised 0.5 percent increase in February.
Investors were also pleased by news of a buyout of SLM Corp., the student lender better known as Sallie Mae. SLM agreed Monday to be sold to two private investment funds and J.P. Morgan Chase & Co. and Bank of America Corp. for $25 billion, or $60 per share. Sallie Mae rose $8.59, or 18.4 percent, to $58.40.
But analysts warned that Wall Street’s good humor was unlikely to last. Robert N. Schaeffer, portfolio manager at Becker Value Equity Fund, contends that a pop in stocks is typical when earnings reports begin to flow in and are better than expected.
“The positive reaction to the earnings tends to be short-lived traditionally,” he said. “There is also a tendency for companies with better earnings reports to report early. The companies that are going to disappoint tend to drag their feet a bit.”
The Dow Jones industrial average rose 108.33 points, or 0.86 percent, putting the blue chip average back above where it stood before the major U.S. indexes fell more than 3 percent on Feb. 27 as part of a worldwide sell-off. The Dow is within about 66 points of its all-time closing high of 12,786.64, reached Feb. 20.
The broader Standard & Poor’s 500-stock index rose 15.62 points, or 1.08 percent, to a six-and-a-half-year high, while the Nasdaq composite index rose 26.39 points, or 1.06 percent.
Bonds advanced, with the yield on the benchmark 10-year Treasury note falling to 4.74 percent from 4.77 percent late Friday. The dollar traded near all-time lows versus the euro, and was mostly lower against other major currencies.
Oil prices fell Monday, with a barrel of light sweet crude settling down 2 cents at $63.61 on the New York Mercantile Exchange.
Economic reports competed with earnings news for investors’ attention Monday. The Commerce Department reported businesses increased their inventories by 0.3 percent in February, the largest increase in five months. The New York Federal Reserve also reported that its regional manufacturing activity expanded slightly in April, with the overall index rising to a reading of 3.80 from an unrevised reading of 1.85 in March. Also, the National Association of Home Builders’ index — a measure of confidence of U.S. homebuilders — fell to 33 from 36 in March for sales of new, single-family homes.
Investors greeted earnings news enthusiastically as they were eager to see how well corporate earnings would hold up. Wall Street anticipates the reports will indicate that corporate growth slowed in the first three months of 2007 compared with previous quarters. Standard & Poor’s recent estimate of first-quarter earnings growth for S&P 500 companies is 3.8 percent.
Investor sentiment about earnings can be easily swayed, however, as one bad report has in the past soured Wall Street’s mood about the overall corporate profit picture.
Citigroup, the largest U.S. financial institution, said its first-quarter profit fell by 11 percent, but the results included a charge to cover a massive restructuring. Excluding that charge, increased revenue helped push profits above expectations. Citigroup, the best performer in the Dow, rose $1.33, or 2.6 percent, to $52.93. The report buoyed financials stocks, which make up the largest slice of the S&P 500 components. Lehman Brothers Inc. rose $3.67, or 5.1 percent, to $75.89, while Goldman Sachs Group Inc. advanced $8.02, or 3.9 percent, to $214.52.
Wachovia Corp., the nation’s fourth-largest bank, reported a rise in profits that surpassed Wall Street’s expectations — which along with Citigroup’s results appeared to reassure some investors that the large U.S. banks are faring better than anticipated, despite trouble in the subprime lending sector. Wachovia rose $1.06 to $55.06.
Eli Lilly & Co.’s first-quarter profit fell 39 percent. After adjusting for certain items, the company’s profit came in above expectations. The drug maker also reported a rise in revenue, and raised its full-year sales and earnings guidance. The stock rose $1.52, or 2.7 percent, to $58.40.
Mattel Inc., the world’s largest toy company, said its first-quarter profit slipped 60 percent, because the year-ago period benefited from a large settlement, but the results beat the average forecast. Mattel fell 24 cents to $28.10.
In other corporate news, Fremont General Corp. said it is planning to sell its residential real estate business and about $2.9 billion in subprime residential mortgages at a loss. The moves will effectively shut down the company, which rose $1.94, or 27.5 percent, to $8.99.
Overseas, Japan’s Nikkei stock average closed up 1.52 percent. Britain’s FTSE 100 closed up 0.83 percent, Germany’s DAX index rose 1.75 percent, and France’s CAC-40 advanced 1.25 percent.
The sometimes-volatile Shanghai Composite Index, whose nearly 9 percent decline Feb. 27 helped touch off the global pullback, rose 2.22 percent.