Bank stocks turbocharged a rally across the financial markets Tuesday, and all three major stock indexes posted their biggest gains of the year. The Dow Jones industrial average rose 218 points and closed at its highest level since the last day of 2007.
The Nasdaq composite closed above 3,000 for the first time since December 2000, when dot-com stocks collapsed.
There was already plenty of good news driving the market higher Tuesday: Retail sales in February increased the most since September, and the Federal Reserve said it expected the unemployment rate to keep falling.
The market soared in the final hour after JPMorgan Chase announced that it plans to buy back as much as $15 billion of its stock and raise its quarterly dividend by a nickel to 30 cents per share.
JPMorgan said it was acting with the blessing of the Federal Reserve, which was preparing to announce the results of a review to make sure banks have enough cash to withstand a financial crisis worse than what happened in 2008.
“That’s what really made the day,’’ said Jeffrey Kleintop, chief market strategist at LPL Financial.
JPMorgan Chase stock soared 7 percent, and other banks followed. Citigroup and Goldman Sachs gained 6 percent. Banks were easily the best-performing stocks in the market, gaining almost 4 percent as a group.
‘The US banking system can now withstand a quite severe recession.’Douglas Elliott Brookings Institution
The Fed had planned to release the results of its review, known as a stress test, for 19 financial institutions Thursday after the market closed. After JPMorgan Chase made its announcement, the Fed pulled a surprise.
The central bank released its stress test results a half-hour after the markets closed Tuesday - two days ahead of schedule. JPMorgan Chase and 14 other financial institutions passed. Four, including Citigroup, failed.
Citigroup stock was down 4 percent in after-hours trading following the Fed announcement.
The Dow finished at 13,177.68, its highest close since Dec. 31, 2007. Tuesday’s close put the Dow within 1,000 points of its record, 14,164.53, set in October 2007. All 30 stocks in the Dow closed higher, the first time that has happened this year.
The Nasdaq composite index rose 56.22 points, or 1.9 percent, to 3,039.88.
The Fed’s stress test results signaled its confidence that the financial system, which nearly collapsed three years ago, is healthy again.
“It’s clearly good news - the US banking system can now withstand a quite severe recession without falling over,’’ said Douglas Elliott, a fellow at the Brookings Institution, a nonpartisan policy think tank.
Besides Citigroup, the other three financial institutions that did not pass the Fed’s hypothetical stress test were Ally Financial, SunTrust, and MetLife.
The Fed reviewed the balance sheets of 19 bank holding companies to determine whether they could withstand a severe crisis: unemployment at 13 percent, stock prices falling 60 percent over two years, and home prices plunging 21 percent from today’s levels.
Along with JPMorgan Chase, US Bancorp and Wells Fargo also said they would raise their dividends following the Fed’s results.
Citigroup Inc. said in a statement that it plans to keep paying out its quarterly dividend of 1 cent a share.
Insurance company MetLife Inc. said it was “deeply disappointed’’ with the Fed’s findings. It had previously announced plans to free itself from the Fed’s oversight by selling off its bank division.
SunTrust Banks Inc. said it will maintain its quarterly dividend, now at 5 cents a share. In a statement, bank executives indicated SunTrust’s finances are solid and said they expect first-quarter profits to top Wall Street’s estimates.
Ally Financial Inc., the former GMAC Bank, was the worst performing bank in the test. The Treasury still owns 74 percent of the bank. Ally protested the stress tests, saying that the analysis overstated the potential mortgage risk in its portfolios.
But the news from the Fed and elsewhere was mostly good, driving the market up. On Dec. 11, 2000, the last time the Nasdaq closed above 3,000, it was in the middle of a horrifying slide - from a peak above 5,000 in March 2000 to just above 1,100 in October 2002.
At the beginning of 2000, the peak of the dot-com frenzy, investors valued stocks in the Nasdaq composite index at an astronomical 175 times their per-share earnings.
Many Nasdaq companies were Internet start-ups with high stock prices but big losses. And many of them failed, taking the Nasdaq down with them.
Jack Ablin, chief investment officer at Harris Private Bank, said the key difference between the Nasdaq then and now is that the technology companies that dominate the index only promised profits 12 years ago.
“The Nasdaq hasn’t done much of anything for 12 years, but it’s had a huge rally in earnings,’’ Ablin said.
The Standard & Poor’s 500 index closed up 24.87 points, or 1.8 percent, at 1,395.96, its highest level since June 5, 2008. The S&P has gained 11 percent since Jan. 1, more than an average year. The S&P is a 12 percent rally from its record of 1,565.15.
Brian Gendreau, market strategist at Cetera Financial, said stocks could still go higher. Investors are paying roughly 14 times the past year’s earnings for the S&P 500 index. The long-term average is closer to 15, and it’s not uncommon for stocks to trade higher than the long-term average and for many years.
“Valuations are still very cheap,’’ he said.