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Stocks ended sharply higher, with the S&P 500 Index posting its best weekly point gain in over three years, on hopes the Federal Reserve will stop raising interest rates after economic growth slowed more than expected in the second quarter. This strong finish comes after a week of volatile trading due to a mixed set of quarterly reports.

Today, the Dow industrial average closed up 119.27 or 1.07% to 11,219.70, the broader Standard & Poor’s 500 index closed up 15.35 or 1.22% to 1,278.55, and the tech-heavy Nasdaq composite index closed up 39.67 or 1.93% to 2,094.14. For the week, the Dow gained 3.2%, the S&P rose 3.1% and the Nasdaq soared 3.7%.

Market breadth was positive. On the New York Stock Exchange, winners topped losers four to one on volume of 1.3 billion shares. On the Nasdaq, advancers topped decliners two to one on volume of 1.4 billion shares.

Before the opening bell, a report on the GDP confirmed a slower economy and raised the possibility of a pause from the Fed. In the second quarter, the GDP grew at a 2.5% annual rate, down from the 5.6% in the first quarter. Economist had expected a growth of 3%. This increases the chances that the Federal Reserve will pause in their long string of interest-rate increases when they meet next in August. At the same time, core inflation rose 2.9%, which could pressure the Federal Reserve to keep lifting rates. The employment cost index rose 0.9%, outstripping analysts’ expectations.

Shares of Wal-Mart rose $0.90 or 2.1% to $44.46, as it announced it is pulling out of Germany and taking a $1 billion charge related to the move. Investors welcomed its decision to pull out of Germany, with the sale of all its 85 hypermarkets to Metro AG. Wal-Mart lost as much as $250 million a year from the German operations. It acknowledged that it misunderstood German regulations, shopping habits and tastes, and that the unit remained unprofitable.

Shares of Chevron closed down $1.60 or 2.5% to $66.13, after the oil company reported that quarterly profit rose 18%, driven by a surge in crude oil prices. However, results fell short of expectations. Net income in the second quarter increased to $4.35 billion, from $3.68 billion in the year-earlier quarter. The EPS was $2.10, against the expected $2.17; while revenue jumped 10.7% to $53.53 billion.

Shares of auto parts supplier Lear closed down $1.29 or 5% to $22.78, despite reporting a narrower quarterly net loss. The net loss for the second quarter narrowed to $6.4 million, from $44.4 million. For the second half of 2006, it expects North American production to be down 7%.

Shares of McAfee closed down $1.88 or 8% to $22.14, after the antivirus software maker reported a lower quarterly net profit and said it would likely restate past financial results. The company was also downgraded by WR Hambrecht to “hold” from “buy.” Likewise, shares of Coventry Health Care closed down $2.10 to $51.81, on poor second-quarter profit. Shares of Office Depot closed down $2.54 or 8% to $34.61, despite 18% rise in second-quarter earnings. However, sales at its stores opened more than a year softened.

Light, sweet crude oil for September delivery fell $1.30 to $73.24 a barrel on the New York Mercantile Exchange. Traders took some profits ahead of the weekend as the weaker than expected GDP report prompted them to review their outlook for U.S. demand for energy products.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter
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