Stocks gain on durables
Wall Street advances thanks to a strong economic report. Investors set aside worries about surging oil prices, even as Gustav heads for the Gulf Coast.
NEW YORK (CNNMoney.com) -- Stocks rallied Wednesday, with financial services companies among the big gainers, as investors shrugged off higher oil prices and instead focused on a surprisingly strong reading on durable goods orders.
The Dow Jones industrial average (INDU) and the broader Standard & Poor's 500 (SPX) index both added around 0.8%. The Nasdaq composite (COMP) gained 0.9%.
Investors also seemed to breathe a sigh of relief that oil prices gave up bigger session gains. Oil had spiked in the morning after a weak inventory report and in response to Tropical Storm Gustav, which is heading for the Gulf Coast.
The rise in durable goods orders was making investors feel a bit more positive about the economic outlook, said Gary Webb, CEO at Webb Financial Group. Additionally, comments from Fed officials both this morning and in recent days have implied that inflationary pressures are waning and that the central bank won't have to raise rates in the near term.
However, stocks are extremely volatile and the perception of "good news" could change swiftly, he said.
"So today the good news is outweighing the bad and that's helping people overlook oil prices," Webb said. "But this could all change by tomorrow or even the end of the day."
Stocks had rallied between mid-July and mid-August as investors welcomed a drop in crude oil prices from a record over $147 a barrel, and a recovery in the U.S. dollar.
However, in the last week or so, stocks have been struggling in a narrow range as oil prices have moved back up.
Thin trading volume is also adding to market volatility right now, with many Wall Street pros taking the last week of August off. Thursday was the lightest trading day of the year on the New York Stock Exchange, with just 820 million shares changing hands. Volume on the NYSE was 1.58 billion, also low. On both the NYSE and the Nasdaq, market breadth was positive, with advancers topping decliners by a decided margin.
Both trading volume and the attention of investors will pick up after Labor Day weekend, said Bill Flaig, portfolio manager of the Arrow Alternative Solutions Fund (ASFFX).
"Post-Labor Day, there's going to be a lot of focus on the economic news," Flaig said. In particular, investors will be looking to see if the downward trend in weekly jobless claims continues and how well retailers are holding up despite the end of the government stimulus checks.
That, in combination with a "gut check" over the financial services sector is really going to set the tone for September, he said.
Fannie Mae was among the stocks likely to be active Thursday after the company announced late Wednesday the departure of three executives, including the chief financial officer and the promotion of three other executives. (Full story)
Thursday also brings reports on second-quarter gross domestic product growth and weekly jobless claims.
Durable goods orders: Orders for big-ticket manufactured goods jumped for a second straight month, the government reported Wednesday. Orders rose 1.3% in July, easily outpacing the 0.1% gain economists were expecting, on average. The rise was in line with the upwardly revised 1.3% increase reported in June.
The strength was largely due to a rise in demand for commercial aircraft, as well as for motor vehicles. Experts don't expect demand for autos to stay strong, considering the tough industry conditions. A category of the report seen as a proxy for business spending also rose soundly, seeing its best result in three months. (Full story).
Fuel prices: While the strong durables report was a positive, investors remained concerned about the spike in oil prices as Tropical Storm Gustav neared the Gulf of Mexico and U.S. oil facilities.
Investors also took in the weekly inventory report, which showed a surprise drop in crude supplies and a bigger-than-expected decline in gas supplies. (Full story).
U.S. light crude oil for October delivery rose $1.88 to settle at $118.15 a barrel on the New York Mercantile Exchange, giving up bigger morning gains.
Retail gas prices continued to drop overnight, extending the downward trend, according to a survey of gas station credit-card activity. Gas prices are down over 10% from all-time highs hit in mid-July. (Full story.)
Financials: Shares of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) gained for the third-straight session, as analysts questioned whether a government bailout was unavoidable. Freddie's $2 billion debt sale Monday received a positive response and some analysts think the companies may have enough capital to absorb billions of dollars in losses from bad mortgage bets, at least for the near term.
A number of financial shares rose, including Dow components AIG (AIG, Fortune 500), American Express (AXP, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).
The gains were broad based, with 25 of 30 Dow components rising.
Airline stocks got hammered as oil prices rose, with air carriers' profits taking a direct hit from the rise in fuel costs. Delta Air Lines (DAL, Fortune 500), AMR (AMR, Fortune 500), Northwest Airlines (NWA, Fortune 500) and UAL Corp (UAUA, Fortune 500) all tumbled. The Amex Airline (XAL) index dropped 3%.
The rising oil prices gave a lift to oil stocks, including Valero Energy (VLO, Fortune 500), Exxon Mobil (XOM, Fortune 500) and Sunoco (SUN, Fortune 500).
In merger news, Japan's Ricoh, a copier and printer maker, will buy U.S. office-gear distributor Ikon Office Solutions (IKN).
Fed's Lockhart: In a speech Wednesday morning, the Atlanta Fed President discussed the Consumer Price Index, one of the closely watched measures of consumer inflation. He said the latest CPI was a high and worrisome number but that it is more likely to be transitory than persistent, according to reports.
Lockhart also said that the recent rise in the dollar has been helpful. The recent strength in the currency has put pressure on dollar-traded commodities, such as oil and gold.
Other markets: In the bond market, Treasury prices inched higher, lowering the yield on the benchmark 10-year note to 3.76% from 3.77% late Tuesday. Prices and yields move in opposite directions.
The dollar was little changed versus the euro and the yen.
COMEX gold for October delivery rose $4.50 to $828.70 an ounce. 
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