NEW YORK (CNNfn) - U.S. stock buyers returned to equity markets Monday to power both the Nasdaq composite index and the Dow Jones industrial average more than four percent higher, following last week's harsh selloff.
"People are buying," Linda Jay, NYSE floor trader with LaBranche & Co., told CNNfn's Market Call. "The question they are asking now is, 'What should I buy?,' not 'How can I get out?'"
The gains followed one of the worst weeks in U.S. market history. The Dow Jones industrials closed the week down by the largest percentage since 1940. Selling followed the devastating terrorist attacks on New York and Washington that resulted in a four-day closing of the markets.
"It was pretty grim (last week), so some kind of snap-back is to be expected," Eric Fry, editor in chief of Grantsinvestor.com, told CNNfn's Market Call. "People are getting back to the business of investing."
The Dow Jones industrial average closed 368.05 higher to 8,603.86, while the Nasdaq composite index rose 76.22 to 1,499.41. The Standard & Poor's 500 index added 37.65 to 1,003.45.
Global indexes added to the gains, as European bourses closed higher, while some Asian markets advanced. Treasury prices were lower. The dollar gained against the yen but fell against the euro. Brent crude futures were down $3.38 to $22.20 a barrel as some of the war-related pressure eased.
Fiber-optic equipment maker JDS Uniphase (JDSU: up $1.03 to $6.39, Research, Estimates), one of the leaders in the battered technology sector, contributed to the positive sentiment. It said it sees the start of a rebound for its industry despite releasing a quarterly sales outlook that falls short of current analysts' estimates.
Comments by influential Goldman Sachs analyst Abby Joseph Cohen also factored in the advance.
"There is no question that third- and fourth-quarter results will be poor, further impeding the 2001 profit totals," the Goldman analyst wrote. "But what should matter most to equity investors is the vigor of the subsequent recovery in 2002 and, critically, whether longer-term growth trends have been disrupted."
"We don't think so, and continue to assume long-term earnings growth of 7 percent-to-8 percent in our valuation model," Cohen added. She raised the stock portion of her model portfolio to 75 percent from 70 percent.
Banc of American Securities' Tom McManus also told clients to raise their stock allocation.
But some analysts cautioned that the gains, though encouraging, were not necessarily sustainable.
"It's a good rally and it's got some legs for a few days, but I wouldn't go nuts chasing after it," Larry Wachtel, market analyst, Prudential Financial, told CNNfn's Street Sweep. "It's going to be challenged in the near future."
Right on cue, after the close of trade, AOL TimeWarner (AOL: Research, Estimates) issued a warning that its cash earnings per share for 2001 will miss estimates. The stock fell $1.30 to $31.20 in after-hours trade.
On the Nasdaq, winning issues beat losers by a more than 2-to-1 margin as 2.03 billion shares changed hands. On the New York Stock Exchange, advancers topped decliners by a nearly 4-to-1 edge as 1.71 billion shares were traded.
JDS leads the techs higher
JDS Uniphase gave a boost to the overall tech sector. Computer hardware stocks such as Dell Computer (DELL: up $1.97 to $18.60, Research, Estimates) and Apple Computer (APPL: Research, Estimates) pulled the Goldman hardware index higher.
Software makers Oracle (ORCL: up $1.76 to $12.52, Research, Estimates) and Siebel Systems (SEBL: up $0.47 to $13.80, Research, Estimates) rose.
Cisco Systems (CSCO: up $0.47 to $12.56, Research, Estimates), Sun Microsystems (SUNW: up $0.77 to $8.73, Research, Estimates) and Intel (INTC: up $2.01 to $21.31, Research, Estimates) all defied negative analyst commentary, rising substantially.
Veritas Software (VRTS: up $2.27 to $21.04, Research, Estimates) announced the release of new and updated storage software products that will allow companies to back up and recover data that is lost. Fellow storage makers EMC (EMC: up $1.70 to $12.85, Research, Estimates) and Network Appliance (NTAP: up $0.29 to $8.31, Research, Estimates) also rose.
Marriott International (MAR: up $0.65 to $30.65, Research, Estimates) CEO Bill Marriott told CNN that although bookings at its hotels fell sharply in September, October is looking better.
Honeywell International (HON: up $3.04 to $27.84, Research, Estimates), one of 20 Dow components trading more than a dollar higher, said it will take a charge of $400 million-to-$500 million in the third quarter to furlough 10,500 people. The aerospace parts maker said that by the year's end it will have cut 16,000 jobs, or 13 percent of its work force, and closed 51 sites, according to Reuters. Aerospace maker Boeing (BA: up $2.70 to $32.80, Research, Estimates) also rose.
Dow component General Electric (GE: up $3.90 to $35.20, Research, Estimates) said Friday it expects to withstand the effects of last week's attacks and post double-digit earnings growth in 2001 and 2002.
Goldman Sachs upgraded its rating on household and personal products maker Procter & Gamble (PG: up $2.46 to $69.46, Research, Estimates), and also upgraded the packaged foods sector, as well as Kraft Foods (KFT: up $1.50 to $33.50, Research, Estimates).
The Dow Jones transport index rose more than 4 percent after President Bush signed into law a $15 billion emergency aid package for the airline industry Saturday. Airline stocks AMR (AMR: up $0.40 to $18.30, Research, Estimates), Northwest Airlines (NWAC: up $0.56 to $11.01, Research, Estimates), and Continental (CAL: up $0.85 to $15.51, Research, Estimates) were among the sector's gainers.
Macy's and Bloomingdale's chain owner Federated Department Stores (FD: up $1.32 to $28.22, Research, Estimates) rose although it warned that it expects September sales to drop sharply.
Wal-Mart Stores (WMT: up $2.62 to $47.28, Research, Estimates), the world's biggest retailer, said it remains on track to achieve previously announced monthly targets for same-store sales to rise 4 percent-to-6 percent.
Goldman Sachs and Merrill Lynch downgraded 17 retailers between them, including Polo Ralph Lauren (RL: up $0.75 to $19.50, Research, Estimates) and Liz Claiborne (LIZ: up $1.36 to $40.91, Research, Estimates), which nonetheless soared from depleted levels.
UBS Warburg raised its rating on credit card issuer Capital One (COF: up $3.05 to $43.05, Research, Estimates) to "buy" from "hold" after the company said Friday it was comfortable with its previously announced target of 30 percent earnings per share growth in 2001.
On the negative side, investors sold VeriSign (VRSN: up $1.56 to $39.86, Research, Estimates) after the Internet domain registrar said it agreed to buy Illuminet Holdings (ILUM: up $1.39 to $36.37, Research, Estimates), a provider of network connectivity and services to telecommunications carriers, in an all-stock deal valued at $1.2 billion.
Analysts downgraded drug maker Vertex (VRTX: down $5.73 to $17.74, Research, Estimates) after the company said it is canceling development of one set of arthritis medications due to adverse effects.
Cable operator Charter Communications (CHTR: down $3.19 to $12.81, Research, Estimates) fell after the company said chief executive Jerry Kent would resign effective Sept. 28.
Troubled discount retail chain Dollar General (DG: down $3.52 to $11.25, Research, Estimates) fell more than 26 percent after the company fired its auditor Friday and said it is setting plans to change the way it accounts for certain expenses.
Oil stocks also were down across the board, including Schlumberger (SLB: down $2.28 to $44.68, Research, Estimates), Anadarko Petroleum (APC: down $2.60 to $44.70, Research, Estimates), and Halliburton (HAL: down $1.38 to $21.20, Research, Estimates). Analysts pointed to a potential reduction in demand that both precedes and is heightened by the terrorist attacks.
Markets bounce off lows
Many market participants saw the weakness in the major markets last week as evidence that the selloff was overdone.
The Dow industrials suffered their biggest point loss ever and the biggest loss on a percentage basis since 1940. The Nasdaq had its third-worst week overall, falling 272.11 points, or 16.1 percent, while the S&P 500 just missed its worst week ever, shedding 127.54, or 11.6 percent.
Looking at the market from a historical perspective, business weekly Barron's cited statistical data showing that the market is undervalued by 17 percent. The magazine also noted that the market was undervalued by 16 percent in 1998, in the period just before the run-up that followed the resolution of a world financial crisis.
"Looking at every shock we have sustained since World War I, the trend has been to fall, then rally, and then move on to higher highs," Robert Stovall, market strategist at Prudential Securities, told CNNfn's Market Call.
"A military goal is good for the economy and good for the markets," he added.
Bush rallies the nation
In a news briefing Monday, President Bush said he was concerned about the huge number of recent layoffs, but said the U.S. economy will come back.
The president encouraged investors to stay invested in the markets, saying "while the numbers aren't going to look too good in the short run, we'll come out of this."
Bush also said that he has signed an executive order to freeze the assets of at least 27 terrorist organizations or individuals, saying the United States aims to starve out the terrorists. 
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