Search

U.S. Stocks Gain as Fed Supports Low Rates Amid Recovery

By Callie Bost and Jacob Barach
June 18, 2014 4:43 PM EDT 67 Comments

U.S. stocks rose, sending the Standard & Poor’s 500 Index to an all-time high, as the Federal Reserve said growth is bouncing back and repeated that interest rates will remain low for a “considerable time.”

FedEx Corp. (FDX) advanced 6.2 percent as the operator of the world’s largest cargo airline predicted a pickup in domestic and global economic growth. Adobe Systems Inc. (ADBE) jumped 8.2 percent after posting revenue and profit that beat analysts’ estimates. ConAgra Foods Inc. dropped 7.3 percent as the company cut its fourth-quarter forecast.

The S&P 500 rose 0.8 percent to a record 1,956.98 at 4 p.m. in New York, gaining for a fourth straight day. The Nasdaq Composite Index (CCMP) jumped 0.6 percent to the highest closing level since 2000. The Dow Jones Industrial Average climbed 98.13 points, or 0.6 percent, to 16,906.62. Global stocks rallied, with the MSCI All-Country World Index reaching an all-time high, and Treasuries advanced.

“There was some expectations that this could be a little more hawkish given that some inflation measures had come up,” Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business, said by phone. State Street Corp. oversees $2.4 billion. “Now that the Fed has not interpreted that in a way that means the economy is overheating, I think the market will be pleased with that result.”

Economic data earlier this week showed that the cost of living in the U.S. rose more than forecast in May. A pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth, giving Fed officials reason to continue to scale back their unprecedented stimulus program.

Asset Purchases

The Fed trimmed bond-buying by $10 billion for a fifth straight meeting, to $35 billion, keeping it on pace to end the program late this year. The policy-making Federal Open Market Committee repeated it’s likely to “reduce the pace of asset purchases in further measured steps” and that it expects rates to stay low for a “considerable time” after the bond-buying ends.

Chair Janet Yellen and her fellow policy makers are debating how long to keep interest rates near zero as the U.S. labor market improves and inflation moves closer to the Fed’s 2 percent goal.

“Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Yellen said at a press conference. She said easy Fed policy, rising home and equity prices and an improving global economy are some factors that should produce above-trend growth.

Target Rate

Fed officials predicted their target interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later, higher than previously forecast. They lowered their long-run estimated rate, reflecting a slower growth rate for the U.S. economy.

Central bank participants estimated long-term growth for the U.S. economy of 2.1 percent to 2.3 percent, compared with 2.2 percent to 2.3 percent in March and 2.5 percent to 2.8 percent in January 2010 in the wake of the most recent recession.

Yellen said stock prices and valuations aren’t outside of historical norms and the Fed isn’t trying to gauge the right level for equities.

The S&P 500 has climbed 7.8 percent since a low on April 11 as data showed the economy is recovering from the impact of extreme weather earlier this year. The gauge dropped 0.7 percent last week as violence in Iraq sent the price of Brent crude to the highest level in 11 months.

Equity Valuations

The benchmark index is trading at 16.6 times the projected earnings of its members, up from 15.5 times at the beginning of the year.

The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), lost 12 percent to 10.61, the lowest level since 2007. The measure of volatility has dropped 23 percent this year, and is within two points of its record low reached in 1993.

The Nasdaq Composite has recovered all its losses from a two-month selloff in technology and small-cap stocks that began in March. The gauge is up 4.5 percent this year. The technology-heavy Nasdaq 100 Index jumped 0.6 percent today to a 13-year high, and the Russell 2000 Index of small-cap companies increased 0.6 percent to the highest level since April 2.

Almost 6 billion shares changed hands today on U.S. exchanges, 3.1 percent below the three-month average.

All 10 main industries in the S&P 500 (SPX) rose today. Utilities advanced the most, with a gain of 2.2 percent. Raw-materials and consumer-staples companies added more than 1 percent each. The Dow Jones Transportation Average surged 1.5 percent, led by FedEx.

FedEx Gains

FedEx jumped 6.2 percent to $148.95 as the company forecast an annual profit that topped some analysts’ projections as it reaps the benefits of a 20-month push to reduce costs and a global economic recovery that’s spurring an increase in shipping. FedEx’s fiscal fourth-quarter profit and revenue topped estimates.

Adobe rallied 8.2 percent, the most in the S&P 500, to a record $73.08. The software maker attracted online subscribers at a faster-than-projected rate, returning the company to revenue growth for the first time in six quarters.

Walgreen Co. rose 4.1 percent to $76.08. Barclays analyst Meredith Adler upgraded the largest U.S. drug retailing chain to overweight from equal weight and increased her price target to $92 from $56. Earnings could get a lift if the board decides to act on shareholder recommendations, she wrote.

ConAgra dropped 7.3 percent to $30.47. The packaged-food company that owns Chef Boyardee and Healthy Choice cut its earnings forecast amid slow sales of consumer foods and shrinking profit at its private-label business.

To contact the reporters on this story: Callie Bost in New York at cbost2@bloomberg.net; Jacob Barach in New York at jbarach1@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland, Will Hadfield

More related content »