At the Athens Stock Exchange, a man passes screens showing graphs of stocks.… (Petros Giannakouris, Associated…)
Reporting from Los Angeles and Washington — In one day, two of the biggest fears tormenting global financial markets since summer have been swept to the sidelines, at least for now.
European leaders agreed on a bold plan to end their 2-year-old debt crisis, while a new report showed that the U.S. economy accelerated last quarter, dousing fears of another recession.
The result was a powerful rally in stocks that left the Dow Jones industrial average on track for its biggest monthly gain in 25 years.
If it sticks, the latest surge in share prices could help bolster business confidence about the economic outlook for 2012.
But it also may further aggravate small investors who have cashed out of the market in droves in recent months, pushed away by wild swings that have left many people frightened and disgusted.
What's more, crucial challenges loom for the wobbly global economy. U.S. consumer confidence has crashed, raising doubts about holiday shopping. China's growth is slowing. And markets could be riled again if congressional leaders fail to reach a deal by Nov. 23 to slash future budget deficits.
On Thursday, though, optimism carried the day. The Dow index ended up 339.51 points, or 2.9%, at 12,208.55, its highest level since July 28. In Europe, stocks jumped 5% or more in Germany, France and Italy, and the euro currency soared against the dollar.
The stage was set after a marathon negotiating session among European heads of state. After two years of being slow to respond to the government debt crisis that began in Greece and has since threatened the entire continent, the leaders surprised skeptics with their new plan of attack.
They agreed to slash Greece's debt burden, while boosting the firepower of a previously created $600-billion rescue fund for struggling member states and banks.
A key goal: Provide guarantees to investors who buy bonds of Italy, to keep interest rates from spiraling higher and driving the Eurozone's third-largest economy into ruin.
"It's a strong signal that they recognize the need to be more aggressive to catch up with the crisis," said Mohamed El-Erian, chief executive of money management giant Pimco in Newport Beach.
Like many other experts, he worries that implementing the program might prove far more difficult than constructing it. Many details still must be ironed out — including exactly how to bolster the finances of the rescue fund.
"If they don't follow up quickly, people will use the markets' rally to exit," El-Erian warned.
But the plan helped damp perhaps the biggest worry dogging markets since mid-July: the risk of another global financial crisis, similar to what followed the crash of brokerage Lehman Bros. three years ago.
"I think there was a 50-50 chance of a systemic collapse of the [European] banking system," said Jim Swanson, investment strategist at MFS Investment Management in Boston. "This takes that off the table."
The global market plunge that began in late July had been triggered in part by fears that Europe's banks would suffer massive losses on government bonds that they own, as doubts about debt repayment spread from Greece to Spain and Italy as well.
As part of the new rescue plan, major European banks are expected to forgive half of the bond debt they're owed by Greece. They also face the tough task of raising more capital as a buffer against other loan losses. But the enlarged scope of the bailout fund — up to $1.4 trillion — also provides more protection for the banks.
Bank stocks across Europe and in the U.S. led the market's advance Thursday. Shares of Societe Generale, one of France's biggest lenders, soared about 23% in the session. On Wall Street, Bank of America Corp. jumped almost 7%.
While the risk of a new banking cataclysm fueled widespread selling in global markets in late July and early August, doubts about the U.S. economy added to the gloom.
Those concerns worsened after credit-rating firm Standard & Poor's downgraded the nation's bond rating on Aug. 5 to AA+ from AAA, citing a lack of progress in curbing federal budget deficits.
By early September some economists warned that the U.S. probably was skirting dangerously close to recession.
But the talk of double-dip recession proved overwrought. Buoyed by continued consumer spending and by strong business investment in equipment and software, the economy grew at a 2.5% real annualized pace in the three months ended Sept. 30, up from 1.3% in the second quarter, the government reported Thursday.
The new data from the Commerce Department showed slow but steady improvement in the economy throughout this year.
"This should almost eliminate people's concerns about a double-dip recession," said Gregory Hess, an economist and dean of the faculty at Claremont McKenna College. "It's going to be slow growth, which means that we're still susceptible to economic shocks, but with building momentum we should be gaining speed."