NEW YORK (CNNfn) - Hopes for an economic and earnings rebound sent U.S. technology stocks higher Friday, capping off Wall Street's first winning quarter in more than a year.|
Contributing to the tech advance and modest pickup in volume was quarter-end portfolio "window dressing" and Russell 2000 index rebalancing.
"Once a year, they (the Russell) decide to add and delete stocks. So what's happening is at the close today, those who run a Russell Fund will need to buy all of the Russell additions and sell all of the Russell deletes," explained Art Hogan, chief market analyst with Jefferies & Co.
The Russell 2000 index rose 9.65 points, or 1.92 percent, to 512.64.
While the reshuffling helped tech stocks, it hurt manufacturing and pharmaceutical issues. In addition, the Dow suffered from the latest developments in the General Electric-Honeywell International deal – with GE rejecting Honeywell's offer to reduce its acquisition price in order to attain European regulatory approval.
A late session networking glitch halted Nasdaq trading. The Nasdaq extended trading until 5:01 p.m. ET. That meant other indexes that carried Nasdaq issues also remained active.
The Nasdaq composite index gained 35.08 points, or 1.7 percent, to 2,160.54. The Dow Jones industrial average flip-flopped, before losing ground at day's end, declining 63.81 points to 10,502.40. The S&P 500 slipped 1.78 to 1,224.42.
For the quarter, the Dow Jones industrial average rose 6.3 percent, the Nasdaq composite index rose 17.5 percent, and the S&P 500 gained 5.4 percent.
With the exception of the Nasdaq, the indexes ended nearly flat for the week as market participants positioned themselves for better times in the second half of 2001. The Nasdaq jumped 6.14 percent for the week.
Market participants were more than happy to bid farewell to a six-month period full of dismal news. From the start of the year, the Nasdaq is down 12.5 percent, the Dow is down 2.68 percent and the S&P is down 7.3 percent.
But the quarterly performance bodes well for the future.
"There seems to be more confidence out there," Mike Murphy, head of equity trading with First Union Securities, told CNNfn's Street Sweep.
Six interest rate cuts by the Federal Reserve and the Microsoft appeal decision lifted overall market sentiment this week and left investors with some good news to digest.
"I think we're toward the end of a period of real weakness and, by the third quarter, all the money (Fed Chairman Alan) Greenspan and the Fed have been pumping out will start to be spent," Bill Cheney, chief economist with John Hancock Financial Services, told CNNfn's Before Hours.
Analysts applauded the market's performance.
"I think the positive tone has been reinforced this week," Joe Cangemi, floor trader with Francis P. Maglio & Co., told CNNfn's Market Call. "Going forward into next week, there's no doubt traders are starting to anticipate that the second half of the year is going to start to be a positive building point."
More stocks rose than fell. Nasdaq winners topped losers 2,311 to 1,401 as 1.72 billion shares traded. Advancing issues on the New York Stock Exchange topped declining ones 1,947 to 1,139 as 1.69 billion shares traded.
In other stock markets, Europe's were mixed while Asia's carved out gains. Treasury securities faltered. The dollar edged lower against the yen and the euro.
GE-Honeywell saga in the spotlight
The Dow Jones industrial average churned on the latest in the saga of General Electric and Honeywell International, both Dow components. With no other major news to focus on, traders reacted to word that another attempt to satisfy European Union concerns about the potential merger of the two companies has been thwarted.
"It continues to give a negative feeling that the story is an off-again story," said Cangemi. "It's been difficult, but the stocks have been volatile and institutions have been moving money in and out."
The General Electric (GE: down $0.69 to $49.51, Research, Estimates)-Honeywell International (HON: up $0.99 to $35.10, Research, Estimates) deal again drew attention amid reports that attempts to salvage the $42 billion merger continued to hit snags.
In the latest development, GE rejected Honeywell's offer to lop nearly $2 billion off its proposed $42 billion takeover. Honeywell's new offer in response to demands from the European Commission "makes no sense for our share owners," GE Chairman Jack Welch said in a letter to Honeywell's chairman, Michael Bonsignore.
Other Dow stocks gained steam to the downside due to the Russell index and portfolio rebalancing, led by losses in United Technologies (UTX: up $1.87 to $72.95, Research, Estimates), Boeing (BA: down $0.03 to $56.33, Research, Estimates), and Johnson & Johnson (JNJ: down $0.15 to $51.04, Research, Estimates).
Technology gains were led by Cisco Systems (CSCO: down $0.03 to $19.19, Research, Estimates), Oracle (ORCL: up $0.19 to $19.77, Research, Estimates), Intel (INTC: down $0.16 to $29.90, Research, Estimates) and Dell Computer (DELL: up $0.04 to $26.91, Research, Estimates).
While investors are looking for brighter days ahead, they should still be prepared for a rough transition to a better economy and corporate earnings.
"I don't think you're going to see an aggressive marketplace, but there's no doubt that the second half of the year is going to be much more successful than the first half," Cangemi said. "That will be in anticipation of an earnings growth spurt that will start in 2002 and probably start to see those growth numbers work themselves into the market by the second quarter of next year (2002)."
The Microsoft effect
The U.S. Court of Appeals for the District of Columbia on Thursday threw out the judgment against Microsoft (MSFT: down $0.13 to $70.47, Research, Estimates), and the new ruling was taken by analysts as pro-business.
"I think there's going to be ongoing euphoria about the Microsoft decision," Hogan said. "It's not just Microsoft – it's sort of a pro-business decision."
Analysts said the Microsoft news had more of a psychological impact than anything else.
"This was a big psychological negative and I think it was one of those things that triggered off the decline in tech stocks last summer," said Alfred Kugel, senior investment strategist with Stein Roe & Farnham. "So the removal of the threat of breakup is a positive psychological thing."
Meanwhile, corporate results warnings and job cuts continued to trickle in.
Communications chipmaker PMC-Sierra (PMCS: up $0.07 to $30.25, Research, Estimates) warned late Thursday that second-quarter revenue will be lower than previously thought, resulting in a wider-than-expected loss.
Agere Systems (AGR.A: up $0.28 to $7.40, Research, Estimates) said it was cutting another 4,000 employees, or about 25 percent of its work force, and expected to take up to $900 million in charges as it restructures its business to cope with the severe downturn in the semiconductor industry. Agere is an optical component maker and former unit of Lucent Technologies (LU: up $0.03 to $6.69, Research, Estimates).
Dow Chemical (DOW: down $0.36 to $34.00, Research, Estimates) warned that low demand for its products hurt both sales volume and prices, leading it to miss its earlier guidance for the second quarter.
Taking a breather from the economy
Two days after the Federal Reserve cut interest rates for the sixth time in six months, investors sat back to digest the impact of the Fed's move. In the accompanying statement Wednesday, the Fed also kept the door open for further cuts if warranted.
The rate cut appeared to satisfy even those who had hoped for a more aggressive move, since it left room for another cut when the Fed meets Aug. 21.
THE FED'S QUARTER-POINT CUT
Money.com's Michael Sivy looks at what the rate cut means for the stock market
In the meantime, investors will focus on incoming data for signs that the first set of rate cuts are making their way through the economy.
In the day's key report, the U.S. economy grew at a slightly slower pace in the first quarter than previously thought, according to the Commerce Department's final read on the U.S. gross domestic product (GDP).
The GDP, the broadest measure of the nation's economy, essentially met expectations and was little changed from the preliminary report.