Stocks Start New Year With Big Rally

Updated from 4:05 p.m. EST

Stocks surged on the first trading day of the new year, as a better-than-expected manufacturing report gave investors hope that the economy is on track for a strong recovery.

The Dow closed up 266 points, or 3.2%, at 8607, while the S&P 500 gained 29 points, or 3.3%, to 909. The Nasdaq added 49 points, or 3.7%, to 1385.

"The manufacturing report caught everyone off guard," said Jim Herrick, managing director of trading at Robert W. Baird. "It's seen as a harbinger of future economic news and that's why the market rallied."

Financial, retail and cyclical stocks rose 3% on average, while drugs rose more than 2%. All 30 Dow components finished in the green.

The Institute for Supply Management said its manufacturing index rose to 54.7 in December compared with 49.2 in November. Economists had been looking for a reading of 50.1. It was the first time in four months that the index had exceeded 50 -- the level than indicates expansion.

"The December ISM figure was such a blowout that it almost seems too good to be true," said David Rosenberg, chief economist at Merrill Lynch. "[It] is unlikely to change the path of this sloppy and choppy recovery any more than the similar outsized figure did last March," he said.

New orders rose to 63.3 last month vs. 49.9 in November, while the prices paid component increased to 56.9 from 55.7. The employment segment came in at 47.4 vs. 43.8. The ISM said the magnitude of the improvement is somewhat difficult to explain.

Still, stocks surged on the news, allowing investors to overlook some more ominous developments.

February crude oil futures jumped 65 cents to $31.85 a barrel in New York after a report from the American Petroleum Institute showed U.S. crude inventories at a 26-year low because of the Venezuelan strike.

Meanwhile, weekly jobless claims rose to a three-month high in the last week of December. New unemployment claims rose by 13,000 to 403,000 while the four-week moving average jumped by 11,250 to 418,750. That's the highest since 424,500 in the week of Sept. 28.

Among Thursday's biggest gainers were chip, hardware and networking stocks despite a Goldman Sachs survey that suggested information-technology spending sentiment had taken a "nasty turn for the worse."

Cisco Systems (CSCO Quote - Cramer on CSCO - Stock Picks) rose 4% to $13.64 even though UBS Warburg cut its revenue and earnings estimate for the firm's January quarter to $4.7 billion from $4.76 billion. Intel (INTC Quote - Cramer on INTC - Stock Picks)jumped 7%, Hewlett-Packard (HWI Quote - Cramer on HWI - Stock Picks)gained 5% and Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) rose 4%.

"I think we are seeing funds throw money at this rally in order to avoid underperforming immediately at the start of the year," said James De Porre, trader and contributor to RealMoney.com, TheStreet.com's sister site.

De Porre noted that all three major averages were up on each of the first three trading days of 2002. "Fund managers are very anxious to start off the new year well after closing a dismal year. When the indices run higher out of the gate like we see today, they are rushing to get long so they don't start off lagging the indices immediately."

Volume on the NYSE hit 1.22 billion shares, with winners beating losers by 2 to 1. On the Nasdaq, 1.27 million shares changed hands, with advancers outpacing decliners by 2 to 1.

U.S. stocks are coming off a brutal year in which the major averages fell for the third time in a row, something that hasn't happened since 1939-1941. The Dow ended the year with a loss of 16.7%, its worst performance in a quarter-century. The Nasdaq has fallen 31.5% for the year, while the S&P is down 23.4%.

On the Dow, J.P. Morgan Chase (JPM Quote - Cramer on JPM - Stock Picks) was a leader after reaching a tentative settlement with most of the insurers it sued in a case arising out the bank's business dealings with Enron. Shares rose 7% to $25.44.

General Electric (GE Quote - Cramer on GE - Stock Picks) also advanced despite news that it could face its first work stoppage in 30 years following the implementation of the company's new managed health care plan, which requires employees to pay an additional $200 a year, the Financial Times reported. GE rose 4% to $25.48.

Separately, the U.S. State Department said on Wednesday it has charged Boeing's (BA Quote - Cramer on BA - Stock Picks) satellite systems unit and Hughes Electronics (GMH Quote - Cramer on GMH - Stock Picks) with illegally sharing space technology with China during the 1990s that may have helped the nation upgrade its ballistic missile program. Boeing rose 2.7% to $33.88.

Citigroup (C Quote - Cramer on C - Stock Picks) announced the details of its first banking deal in China Thursday, saying it would pay $72 million for a 5% stake in China's Shanghai Pudong Development Bank. The news provided a lift for the stock, trading up 3% to $36.35.

In the drug sector, Elan(ELN Quote - Cramer on ELN - Stock Picks) saw its shares rise 12% to $2.76 after disclosing positive results in The New England Journal of Medicine regarding its Antegren drug, a treatment for multiple sclerosis it is codeveloping with Biogen (BGN Quote - Cramer on BGN - Stock Picks).

Merck(MRK Quote - Cramer on MRK - Stock Picks) gained 3% to $58.25 after its asthma medicine Singulair won approval as a treatment for hay fever.

Meanwhile, Abbott Laboratories (ABT Quote - Cramer on ABT - Stock Picks)won early U.S. approval for Humira, an arthritis drug that could produce annual sales of $1 billion. Abbott was up 0.13% to $40.05.

Elsewhere, Parametric(PMTC Quote - Cramer on PMTC - Stock Picks), a maker of manufacturing and engineering software, said it would post a loss for its fiscal first quarter, compared with previous guidance of break-even. The company cited the "continued hesitation within the manufacturing sector to invest in technology" as the principal cause for the shortfall. Parametric is expected to announce final results for the first quarter on Tuesday, Jan. 14, before the market opens. PMTC slid 21% to $2.00.

Lehman Brothers lowered its investment rating on First Health Group (FHCC Quote - Cramer on FHCC - Stock Picks) to underweight from equal weight, saying it would be an underperformer in the managed care sector.

Goldman Sachs upped its rating on youth-oriented apparel retailer American Eagle Outfitters(AEOS Quote - Cramer on AEOS - Stock Picks) to reflect solid momentum in its women's line, easier comparisons and improved spring inventory positioning.

Treasury issues were sharply lower, with the 10-year note plunging 1 3/4 to yield 4.05%. The 30-year bond was down 2 7/8, yielding 4.96%.