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S&P 500 Approaches Record on Signs Fed to Keep Rates Low

By Oliver Renick
August 19, 2014 5:04 PM EDT 67 Comments
Federal Reserve Chair Janet Yellen will be among the speakers at the annual Jackson Hole symposium on monetary policy.
Photographer: Andrew Harrer/Bloomberg
Federal Reserve Chair Janet Yellen will be among the speakers at the annual Jackson Hole symposium on monetary policy.

U.S. stocks are closing in on record highs, with the Standard & Poor’s 500 Index rebounding at the fastest pace since February, as concerns over global crises give way to optimism that central banks will continue to accommodate a recovering economy.

More than $710 billion has been restored to American equities in the past month and the S&P 500 is within 0.3 percent of an all-time high amid bets that the Federal Reserve will leave interest rates near zero for longer even as economic growth shows signs of accelerating. The U.S. equity benchmark added 0.5 percent to 1,981.60 at 4 p.m. in New York today.

Stocks rallied today as retailers led gains on better-than-projected earnings while data showed inflation pressures remain limited and housing starts jumped. The Nasdaq Composite added 0.4 percent, its fifth straight day of increases, to the highest level since 2000. The Dow Jones Industrial Average rose 80.85 points, or 0.5 percent, to 16,919.59, still 219 points from its record. Apple (AAPL) Inc. jumped 1.4 percent to close at an all-time high.

“The market has come back strong this week in a repeat of what we’ve seen throughout the bull run, the ability to motor through geopolitical events,” Tim Rudderow, president and chief investment officer at Newtown, Pennsylvania-based Mount Lucas Management Corp., said via phone. He helps oversee $1.5 billion. “Today’s numbers were solid but not spectacular, and that’s perfect in an environment where really robust economic growth would not be positive.”

The S&P 500 has rebounded 3.8 percent since a three-month low on Aug. 7, the best eight-day return since the period ended Feb. 18. The gauge tumbled as much as 3.9 percent from its all-time high on July 24 amid growing concern over global conflicts from Ukraine to Gaza and Iraq.

Nasdaq Rallies

The Nasdaq Composite (CCMP) advanced 0.4 percent today after rallying 1 percent to its highest level since March 2000 yesterday. The Dow Jones Internet Composite Index is at the highest since March after tumbling nearly 20 percent after investors sold off the best performers during the five-year bull market amid concern valuations had become too expensive.

The Nasdaq is 13 percent above its February low. The last time the measure closed this high, on March 31, 2000, it went on to sink 46 percent through the end of that year as the dot-com bubble burst.

The S&P 500 is trading at 17.8 times the reported earnings of its companies, near the highest level since 2010. The gauge is back above its average price for the past 50 days, after having plunged below it on July 31. The Dow closed today above its 50-day average for the first time this month.

‘Higher Range’

“Valuations are getting a little on the higher range compared on a short-term basis,” Diane Garnick, chief executive officer of New York-based Clear Alternatives LLC, said in a phone interview. “People tend to compare to only what they remember, so as a result, people are absolutely sensitive to higher valuations. If we had this level in 1998 nobody would notice.”

Stifel Nicolaus & Co.’s Barry B. Bannister increased his year-end forecast for the S&P 500 to 2,300, giving him the highest projection among 19 strategists tracked by Bloomberg. Previously he was tied for the lowest at 1,850. Bannister’s new estimate implies a 16 percent rally by the end of December.

Foreign investors may increase purchases of U.S. stocks because of doubts about their own economies and central-bank policies, according to the report from Stifel.

Other strategists are predicting weaker returns. Jonathan Glionna of Barclays Plc said overseas markets are generating too little demand for the S&P 500 to end the year any higher than current levels. Gains approaching 25 percent annually will weaken to 3 percent over the next decade as profit expansion reverts to its historic rate since 1929, said Doug Ramsey, the chief investment officer at Leuthold Group Llc.

Fed Stimulus

Three rounds of Fed stimulus and better-than-estimated corporate earnings have sent the S&P 500 higher by as much as 194 percent from its bear-market low on March 2009. The gauge has not had a decline of 10 percent in almost three years.

Stocks fell earlier this month after data showing strong economic growth and hiring stoked speculation the Fed may raise rates sooner than investors had been anticipating. The S&P 500 rallied 1.2 percent last week as data on retail sales and jobless claims showed an uneven economic recovery, fueling bets the central bank will leave rates near record lows for longer.

Jackson Hole

The Fed will release the minutes of its last gathering tomorrow, before central bankers meet in Jackson Hole, Wyoming. Fed Chair Janet Yellen and European Central Bank President Mario Draghi will be among the speakers at the annual symposium on monetary policy.

A report today showed the cost of living in the U.S. climbed in July at the slowest pace in five months, indicating price pressures remain limited even as the economy picks up.

Inflation continues to run below the Fed’s target as sluggish global demand limits companies’ ability to charge customers more. Restrained increases give the central bank’s policy makers room to keep interest rates low well after the projected end of their bond-buying program in October.

“We keep hearing about Federal Reserve liquidity and how it’s going to put inflation through the roof, but inflation has been right in line,” Matt Maley, the Newton, Massachusetts-based equity strategist at Miller Tabak & Co. LLC, said via phone.

Housing starts surged in July to the highest level in eight months, underscoring the recent pickup in builder optimism as the U.S. residential real-estate market gains some traction.

Homebuilders

An S&P index of homebuilders gained 2.6 percent, giving it the biggest two-day rally since May after jumping 2.1 percent yesterday on a report showing industry confidence rose in August. D.R. Horton Inc. advanced 3.3 percent and KB Home increased 2.7 percent.

“With tame inflation data and the housing market benefiting from the drop in mortgage rates, it’s painting a pretty sanguine picture,” Russ Koesterich, chief investment strategist at New York-based BlackRock Inc., said by phone. “Housing starts were encouraging, and the housing market is one area the Fed has been concerned about being somewhat fragile.”

The Chicago Board Options Exchange Volatility Index, the gauge of S&P options prices known as the VIX (VIX), declined 0.9 percent to 12.21. The gauge is down 11 percent for the year.

Retailers had the biggest advance among 24 groups in the S&P 500, climbing 1.9 percent.

Retail Earnings

Home Depot Inc. advanced 5.6 percent to a record $88.23 after earnings topped analysts’ estimates and the company raised its forecast. Chief Executive Officer Frank Blake has focused Home Depot on boosting sales from existing locations and investing in e-commerce, rather than opening new stores.

TJX Cos. increased 8.7 percent to $58.56. The discount apparel company that owns T.J. Maxx and Marshalls raised its profit forecast after comparable-store sales grew faster than estimated. Dick’s Sporting Good Inc. added 1.6 percent to $44.21. The company beat second-quarter earnings projections, though it said promotions and advertising will weigh on profit the rest of the year.

Stagnant Sales

The results, together with the rosy outlook from Home Depot, fueled investor optimism after a series of disappointing retail earnings reports. Wal-Mart Stores Inc., the world’s largest retailer, posted stagnant U.S. same-store sales last week, marking the sixth straight period of no growth. That followed a report from the Commerce Department that retail sales were little changed in July, hampered by a lack of wage gains.

Aeropostale Inc. (ARO) rose 19 percent, the most since 2002, to $3.87 after the struggling kids and teen apparel chain said Julian Geiger has returned as chief executive officer.

Apple rose 1.4 percent to $100.53. The stock capped a fifth day of gains as investors look ahead to new products such as bigger-screen iPhones and a wristwatch-like device that may jump-start revenue growth. Today’s close topped the split-adjusted record of $100.30 reached Sept. 19, 2012, just before the iPhone 5 went on sale.

Elizabeth Arden Inc. plunged 23 percent to $15.05, the lowest level since 2010, after saying a decline in sales of celebrity fragrances was steeper than anticipated in the fourth quarter. Net sales dropped 28 percent from the prior year as Justin Bieber and Taylor Swift fragrances slumped.

To contact the reporter on this story: Oliver Renick in New York at orenick2@bloomberg.net

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

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