Stocks Surge On Hopes Financial Woes Are Easing

Only on Wall Street can billion-dollar bank losses be a good thing.

Stocks started off the second quarter with a soaring rally on Tuesday that sent the Dow Jones industrials up nearly 400 points, its best performance in two weeks. Investors seemed to take heart in a fresh round of mortgage-related write-offs at UBS and Deutsche Bank and a capital infusion at Lehman Brothers, the brokerage firm.

Despite the discouraging numbers — $19 billion in write-downs at UBS and nearly $4 billion at Deutsche in the first quarter alone — investors appeared hopeful that the bad news could signal the last of Wall Street’s subprime woes.

“Nobody’s kidding themselves,” said Ed Yardeni, the investment strategist. “The financial crisis isn’t over. But the Fed and Congress and other financial regulators have made it very clear that they are going to use all the powers available to them to avoid a financial meltdown and end this credit crisis.”

The Standard & Poor’s 500-stock index gained 3.6 percent on the strength of a surge in shares of financial services firms. Lehman Brothers, the bond insurer MBIA and the mortgage giant Fannie Mae — stocks that have suffered painful losses in recent weeks — were among the index’s biggest gainers.

“It’s psychological,” said Richard Sparks, a senior analyst at Schaeffer’s Investment Research. “When a company comes out and writes down more, it leads people to believe that they’re being forthright.”

“We’re hoping that we are closer to the end than the beginning,” he added.

Adding to the good feelings in the financial sector, Lehman said private investors had snapped up a $4 billion offering of preferred stock — more than expected — in a move to dispel a swirl of rumors about its stability. Shares of the brokerage jumped 17 percent. UBS said it would try a similar move with $15 billion in additional funds; its shares closed up 15 percent.

“Lehman demonstrated that not only could they raise the capital at a reasonable cost, but that the Fed really had succeeded at stabilizing the financial system,” Mr. Yardeni said. “Lehman was an important test of that.”

Treasury yields rose as investors moved out of the ultra-safe government bonds, and the dollar advanced against the euro, signs of increased confidence among investors that Wall Street will weather the credit crisis.

The Dow finished at 12,654.36, and the Nasdaq composite index closed up 3.7 percent. Markets in Europe closed higher as well, with benchmark indexes in London, Paris, and Frankfurt all gaining about 3 percent.

The triple-digit swing in the Dow extends the volatility that has rocked stock markets in recent months, as jumpy investors react quickly and violently to incremental developments in the tight credit market. “Each big move we have is almost all coming out of news from that sector,” Mr. Sparks said.

The S.& P. 500 just finished one of its most volatile first quarters since the Great Depression. The Dow has swung more than 100 points in 7 of the last 11 sessions.

And though some observers will take Tuesday’s rally as a sign of recovery, this type of investing strategy does not have a good track record. Last fall, as Citigroup became one of the first Wall Street firms to acknowledge its mortgage-related assets had lost billions of dollars in value, markets rallied in the hopes that the worst was over. The Dow has since fallen 11.6 percent from its October high.

The market gains may have been helped by a better-than-expected report on industrial activity.

A closely watched manufacturing report, prepared by the private Institute for Supply Management, ticked up last month, though business is still shrinking within the industry. The gauge of manufacturing activity edged up slightly to a reading of 48.6 in March from 48.3 in February, slightly better than expected. Any reading below 50 is seen as a sign of contraction.

Elevated export orders continue to offset flagging domestic demand, but manufacturers are feeling the effects of inflation: a gauge of prices paid for production materials reached its highest level in nearly six years.

Spending on construction projects also improved, as overall spending fell 0.3 percent in February after declining 1 percent in January, the Commerce Department said on Tuesday. Government-financed building is increasing even as private residential construction remains in a slump.

Investors were also buoyed by a drop in commodity prices, which have reached record levels in recent weeks. The declines in prices for oil, gold and wheat could translate to cheaper prices for consumers.

Crude oil has fallen for three consecutive days; it dropped by 41 cents on Tuesday to just under $102 a barrel. Gasoline prices were also trading lower. Gold, which becomes more expensive in times of crisis, declined to $888 a troy ounce after reaching $1,000 two weeks ago.

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