Stocks Gain as Economy Slumps

News that the U.S. economy suffered through its worst slump in seven years in the third quarter wasn’t enough to dissuade investors from buying stocks on Thursday.

The Commerce Department reported that the economy contracted by 0.3% in the third quarter, the worst showing for the economy since the aftermath of the Sept. 2001 terrorist attacks, but it was still better than the 0.5% decline that economists expected.

The biggest drop in consumer spending in 28 years — and the first in 17 — was largely responsible for the slowdown, although a 5.5% drop in equipment and software spending led a generally weak business investment environment. Computer sales added a fraction to GDP.

Government spending, exports and inventories kept the report from being worse, and with the economy slowing sharply in the last two weeks of the quarter following the bankruptcy of Lehman Brothers, expectations are for an even weaker fourth quarter, which would mark an official recession.

Chip stocks led the market higher, with huge gains in AMD (NYSE: AMD) and Intel (NASDAQ: INTC) — even as stalwarts such as Microsoft (NASDAQ: MSFT) and Cisco (NASDAQ: CSCO) were left out of the rally. The Semiconductor Industry Association’s report of 1.6% sales growth in September was enough to spark the chip sector rally.

Alcatel-Lucent (NYSE: ALU) gained 9% after narrowing its third-quarter loss, but Symantec (NASDAQ: SYMC), Motorola (NYSE: MOT) and Expedia (NASDAQ: EXPE) tumbled on downbeat earnings reports.

Foundry (NASDAQ: FDRY) gained even after agreeing to a lower takeover price with Brocade (NASDAQ: BRCD).

Oracle (NASDAQ: ORCL), Apple (NASDAQ: AAPL), Yahoo (NASDAQ: YHOO), EMC (NYSE: EMC), VMware (NYSE: VMW) and HP (NYSE: HPQ) all gained more than 6% each. EMC gained on news of a hedge fund stake.

Sun (NASDAQ: JAVA) was up 9.5% ahead of its results, then was little changed after hours after reporting sales on the low end of expectations that were lowered just last week.

The Nasdaq rose 41 to 1698, the S&P gained 24 to 954, and the Dow rose 189 to 9180. Volume declined to 6.28 billion shares on the NYSE, and 2.55 billion on the Nasdaq. Advancers led by a 27-6 margin on the NYSE, and 21-7 on the Nasdaq. Upside volume was 83% on the NYSE, and 75% on the Nasdaq. New highs-new lows were 7-103 on the NYSE, and 5-157 on the Nasdaq.

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