Consumer mood gives stocks a lift

NEW YORK —  Consumers are feeling somewhat better, and that’s making investors feel better too. But some market watchers question how long these mutually reinforcing good moods can last.

The stock market rose for the first time in a week Tuesday as unexpectedly strong data on consumer confidence sparked optimism that spending by Americans could support a hoped-for economic recovery in the second half of the year.

The Dow Jones industrial average jumped nearly 200 points, or 2.4%, bolstered by stocks of companies such as restaurant, hotel and clothing chains whose fortunes are closely tied to the economy.

The sharp advance intensified a debate on Wall Street about whether the stock market can keep powering ahead after surging from multiyear lows two months ago.

In market parlance, bears expect that stocks will “test,” or fall close to, their early-March trough as investors’ delight over an apparently stabilizing economy gives way to a realization that the housing and job markets remain stubbornly weak.

But stocks have thus far defied that logic, largely moving sideways for the last two weeks.

“You’ve got all these people saying ‘a test, a test,’ ” said Marc Pado, market strategist at Cantor Fitzgerald. “There’s not going to be a test, at least not the kind people expect. We’re not going to go back down anywhere near the March lows.”

Spirits were buoyed Tuesday when the Conference Board reported that its index of consumer sentiment jumped to 54.9 this month, its highest level since September. That was up from a revised 40.8 in April and well above the 42.6 reading expected on average by economists.

“While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us,” said Lynn Franco, the Conference Board’s director of consumer research.

The increase, the third in a row since the 4-decade-old index hit a record low in February, partly reflected an improved perception of the employment market.

The so-called expectations index, a measure of the conditions consumers foresee in the coming months, surged to 72.3 from 51.

That was reinforced by data released in a report from the Federal Reserve Bank of Richmond, Va., indicating the first upturn in a year in regional manufacturing activity.

Investors who bid up stocks Tuesday hope that resilient consumers will increase spending in time for the back-to-school season in late summer, helping manufacturers and retailers boost their depleted earnings.

The Dow advanced 196.17 points, or 2.4%, to 8,473.49. The Standard & Poor’s 500 index added 23.33 points, or 2.6%, to 910.33. The Nasdaq composite index leaped 58.42 points, or 3.5%, to 1,750.43.

The gains put the S&P; 500 back into positive territory for the year. The Dow, however, is still down 3.5% year to date, and the Nasdaq is up 11%.

So-called discretionary consumer stocks in the S&P; 500 jumped 3.8% on average Tuesday. Newspaper publisher Gannett shot up 10%, while Home Depot advanced 4.1%.

The sector’s hotel chains did especially well. Wyndham Worldwide jumped 9.1%. Starwood Hotels & Resorts Worldwide climbed 9%.

Financial stocks, which have remained volatile, had the best performance among the broad 10 industry groups in the S&P; 500, finishing up 4.1%. JPMorgan Chase bounded 6.2%, U.S. Bancorp jumped 6.8% and Wells Fargo gained 5.5%.

But there is only so much that consumer confidence alone can do for stocks.

One reason consumers are feeling better is that their portfolios have rebounded sharply since early March. So Tuesday’s rally relied on something akin to a perpetual energy machine.

Moreover, there are serious questions as to whether consumers can come to the market’s rescue.

The most obvious concern is a continued free fall in housing prices, which was reinforced with new data released Tuesday. The widely followed S&P;/Case-Shiller index of home prices in 20 cities slumped 18.7% from March 2008 through March 2009. (Los Angeles was off 22.3%.)

Also, the job market remains weak, and consumers have boosted their rate of savings and begun whittling their debt.

“The type of environment we’re in, and coming out of, is unlike anything we’ve seen in our lifetimes,” said Dan Greenhaus, market analyst at Miller Tabak & Co. in New York. “How consumers perform in a massive deleveraging phase remains to be seen.”

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walter.hamilton@latimes.com