Wall Street investors took comfort in the apparent resilience of American consumers Thursday, propelling the stock market into record territory with its biggest one-day gain in more than four years.
Setting aside worries about rising interest rates and big U.S. trade deficits, buyers plunged ahead, sending the Dow Jones Industrial average soaring 284 points or 2.1 percent to close at a record 13,861.73.
It was the first time in a year that the widely watched benchmark had risen more than 200 point in a single session, and it was the biggest point gain since October 2002. It was only the Dow's third 200-point gain of the past four years. The broader S&P 500 average rose 1.9 percen to close at about 1,548 — also an all-time high.
The rally came even as investors had been braced for potentially weak June sales figures from the nation's biggest retailers. With energy prices rising and housing prices falling, consumers have been getting squeezed lately. Consumer spending in the second quarter is believed to have slowed to less than half the 4.2 percent pace posted in the previous two quarters, according to the latest survey of economists from Blue Chip Economic Indicators.
But as June figures from various retail chains began coming in Thursday stronger than Wall Street analysts had expected, investors started buying. Wal-Mart, one of the 30 stocks that make up the Dow Jones industrials, posted a stronger-than-expected 2.4 percent gain in sales at U.S. stores open at least a year. The world’s largest retailer also said its previous forecast for higher second-quarter earnings is "attainable."
Other retailers also rang up respectable sales gains. Sales at 50 major chains rose a combined 2.4 percent, according to a tally by the International Council of Shopping Centers. The results beat its most recent forecast of a 1.5 to 2 percent rise, but trailed last June's advance of 3 percent.
Though the results were upbeat, the June figures were tempered with caution.
"Consumers continue to be challenged financially, with more pressure on discretionary spending," Eduardo Castro-Wright, Wal-Mart Stores U.S. president and chief executive, said in a statement.
The longer-term outlook for continued spending strength remains cloudy. Though job growth and wage gains were solid in the second quarter, some economists believe the rebound will begin cooling later this year. And even the most optimistic forecasts don’t see the housing market turning around until next year at the earliest.
"Everybody has been going after the aging baby boomer demographic; it's been so promising for a lot of people," said Adrienne Tennant, who follows retailers at Friedman Billings and Ramsey. "But what's really happening, I think, is that when these aging baby boomers see that their houses are no longer going up in value or their retirement accounts are no longer going up in value, they tend to be more rational spenders."
Nonetheless, Wall Street is feeling upbeat about the rest of the year. Profit growth is expected to pick up sharply; the companies that make up the S&P 500 are expected to post an average 4.4 percent increase in profits when they report their second-quarter results in the next few weeks, according to analysts surveyed by Thomson Financial. Those gains are expected to rise to 6.2 percent in the third quarter and to 12.3 percent in the fourth quarter.
Though weaker consumer spending could slow the U.S. economy, Wall Street has been heartened by booming economic growth in the rest of the world. Strong growth in countries like China, India and Russia has boosted global demand for everything from raw materials to finished goods.
Thursday’s stock rally also got a boost when mining company Rio Tinto offered to buy Canadian aluminum producer Alcan for $38.1 billion, topping a bid from Alcoa that has been rejected in May. Share of both Alcan and Alcoa — another Dow stock — jumped on the news. After the market closed, Alcoa announced it would terminate its offer.
The Alcan offer was the latest in a string of mergers and acquisitions that have helped propel the market deeper and deeper into record territory since last fall.
While a weak dollar has made imported goods more expensive for American consumers, it’s been something of a windfall for U.S.-based companies with big export volumes or major operations overseas. A weak dollar makes U.S. goods more competitive in those overseas markets because they're cheaper than goods priced in stronger foreign currencies.
Those exporters also get more bang for their buck when they covert foreign currencies back into dollars. That has given a boost to stocks of large companies with big global footprints.
“With international markets so strong and an international economy so strong, we see the large (capitalization) stocks really being able to take advantage of that economic strength and continue to deliver on consistent earnings and economic growth for their shareholders,” said Rafael Resendes, co-founder of the stock research firm Applied Finance Group.
Though the good times are rolling on Wall Street, there are a number of forces that could derail the current rally. Some market watchers have recently said they’re seeing early signs of a slowing in the ongoing buyout boom — with private equity firms spending hundreds of billions of dollars worth of stock to buy up public companies and take them private, shrinking the supply of stock to invest in. That flood of capital into the stock market has been a big factor pushing the market to new highs; any unwinding of that flow could throw cold water on the current rally.
For now, the market seems to be awash in money, thanks largely to a prolonged period of low interest rates and tame inflation. Any reversal of those forces could also send the bulls on Wall Street scurrying. But for the time being, market watchers seem to think the current stock market rally still has legs.
“I think we'll probably run up to 1,600, 1,650 area (on the S&P 500 index)” said Standard and Poor's chief technical strategist Mark Arbiter. “Individual investors are not playing the market. I think there is a lot of money sitting on the sidelines, and I think it might be forced in this time.”