U.S. Stocks Rally on Earnings, Federal Reserve Stimulus
Nov. 4 (Bloomberg) -- David Rosenberg, chief economist at Gluskin Sheff & Associates, talks about the impact of the Federal Reserve's quantitative easing on stocks and the outlook for the U.S. economy. Rosenberg talks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Nov. 4 (Bloomberg) -- Bloomberg's Courtney Donohoe reports on the performance of the U.S. equity market today. Stocks gained, sending the Standard & Poor’s 500 Index to its highest level since September 2008, as investors speculated the Federal Reserve will succeed in stoking growth and that banks will raise dividends. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)
U.S. stocks gained, sending the Standard & Poor’s 500 Index to its highest level since September 2008, as investors speculated the Federal Reserve will succeed in stoking growth and that banks will raise dividends.
JPMorgan Chase & Co. and Bank of America Corp. more than 5.2 percent after the Wall Street Journal said the Fed is expected to let strong banks raise cash payouts. Freeport- McMoRan Copper & Gold Inc. and Monsanto Co. gained at least 5.5 percent as commodity prices surged. Qualcomm Inc., the biggest maker of mobile-phone chips, rose 5.8 percent after its profit and sales forecasts topped analysts’ estimates.
The S&P 500 rose 1.9 percent to 1,221.06 at 4 p.m. in New York, finishing at the highest level since Sept. 19, less than a week after Lehman Brothers Holdings Inc.’s bankruptcy sent the economy into a tailspin. The Dow Jones Industrial Average gained 219.71 points, or 2 percent, to 11,434.84. The Nasdaq-100 Index jumped 1.4 percent to a three-year high.
“This rally has a little different feel to it,” said Warren Koontz, chief investment officer for large-cap value stocks at Loomis Sayles & Co. in Boston, which oversees about $150 billion. “It might have more staying power than the ‘risk- on, risk-off’ trade. We have additional stimulus to the economy. The pendulum is swinging back to people being comfortable with the idea that we’re not going to see a double dip” recession.
Stocks extended yesterday’s advance that sent the Dow to a two-year high after the Federal Open Market Committee said the central bank will purchase as much as $600 billion of assets through June. Equities also gained yesterday after midterm elections resulted in divided control of Congress, making it less likely lawmakers will pass any more major business reforms.
‘Bernanke Put’
“It’s called the Bernanke put,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $140 billion. “The Fed wants to put a floor under the employment market and asset prices. You’re seeing that being reflected in both stock and commodities markets. Risk assets are attractive. From a fundamental standpoint, things may not be improving rapidly, but they are not deteriorating rapidly.”
Stock-index futures extended gains before the start of trading as a Labor Department measure of worker productivity increased at a 1.9 percent annual rate after falling 1.8 percent in the previous three months. The median forecast of economists surveyed by Bloomberg News projected a 1 percent gain. Other government data showed jobless claims increased more than estimated to 457,000 last week, underscoring the need for the Fed’s stimulus to bolster the job market.
Jobs Report
The Labor Department may say tomorrow that the unemployment rate was 9.6 percent in October for a third month, according to the median forecast of economists surveyed by Bloomberg. The jobless rate peaked at 10.1 percent a year ago, the highest since 1983.
Earnings-per-share have topped estimates at 300, or 77 percent, of the 392 companies in the S&P 500 that have reported earnings since Oct. 7, according to data compiled by Bloomberg.
Financial shares rose 3.4 percent as a group today, the biggest gain in the S&P 500 among 10 industries. The Fed is expected to start allowing healthy banks with strong capital levels to increase dividend payments, the Wall Street Journal reported today on its website, citing people familiar with the matter.
JPMorgan gained 5.5 percent to $39.80, while Bank of America rallied 5.3 percent to $12.13.
‘Back to Normal’
“It looks like banks will be able to go back to normal dividend payments sooner than what many people expected,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion. “That’s quite supportive for prices and could be taken as a sign that banks are in a more financially secure condition.”
Gauges of raw-materials and energy producers rallied at least 3 percent. The Thomson Reuters/Jefferies CRB Index of commodities rose to a two-year high after the Fed’s plan sent the dollar lower and spurred demand for raw materials as a hedge against inflation.
“The risk-on trade is clearly on,” David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, wrote in a note today. “Risk assets from equities, to credit, to emerging markets have become correlated with a weaker dollar in an unprecedented fashion. All one needs to do is follow the greenback. Hard to believe it’s that easy, but this seems to be the environment that Ben Bernanke et al have managed to create in their quest to reflate the global economy.”
Dollar Slumps
IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners including the euro, dropped for a third day, losing 0.7 percent to 75.92 and touched 75.631, the lowest since December.
The lockstep relationship between U.S. stocks and Treasury yields has disappeared in the past 2 1/2 months, while equities and the dollar last moved this much in opposite directions in 1991, following the Fed’s plan to purchase assets in a technique known as quantitative easing.
The shift began after Fed Chairman Ben S. Bernanke said on Aug. 27 that the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows. The $600 billion plan was announced on Nov. 3.
The correlation using 30 days of data for the S&P 500 and the yield on 10-year Treasuries has plummeted to negative 0.05, the lowest since July 2007, from 0.66 at the start of the fourth quarter and a record 0.89 in June. The figure for the S&P 500 and Dollar Index, which tracks the U.S. currency against those of six trading partners, sank to negative 0.68.
No Relationship
Correlation readings of 1 signal assets are moving the same amount in the same direction, while negative 1 means identical moves in opposite directions. Zero shows there’s no relationship at all.
“What you should see in a recovery is yields going up and stock prices going up at the same time,” said Walter Todd, co- chief investment officer at Greenwood Capital, which oversees about $900 million. “That correlation is breaking down because you’ve got a third party, i.e. the Fed, manipulating the Treasury market.”
Freeport, the largest publicly traded copper producer, rallied 7 percent to $103.89. Monsanto, the world’s largest seed company, gained 5.5 percent to $62.82. Schlumberger Ltd., the largest oilfield services provider, rose 5 percent to $75.80.
Qualcomm jumped 5.8 percent to $48.34. The phone chipmaker predicted earnings in the current quarter of at least 58 cents a share. That compares with the 52-cent average of projections compiled by Bloomberg. Qualcomm forecast sales of $3.05 billion to $3.35 billion, more than the $3 billion average analyst in a Bloomberg survey.
Stock Buyback
Time Warner Cable Inc. gained 4.5 percent to $62.33. The second-largest U.S. cable operator reported third-quarter profit excluding some items of $1.04 a share, beating the average analyst estimate of 90 cents, and announced a $4 billion stock buyback.
Industrial companies in the S&P 500 rallied 2.2 percent. Caterpillar Inc., the largest maker of construction and mining equipment, rose 4.1 percent to $83.18.
Boeing Co. advanced 2.8 percent to $70.85. The world’s second-largest commercial-jet builder gained after Airbus SAS and Rolls-Royce Group Plc began investigating why an engine on a Qantas Airways Ltd. A380 superjumbo exploded in mid-flight, forcing an emergency landing in the worst incident since the aircraft began service in 2007.
Groceries
Whole Foods Market Inc. soared 15 percent, the most since August 2009 and the biggest gain in the S&P 500, to $47.27. The largest U.S. natural-goods grocer raised its 2011 profit forecast to as much as $1.71 a share, compared with an earlier high of $1.64.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, slumped 5.3 percent to 18.52. The index has retreated almost 15 percent in three days.
“Although the market is still trying to decide if the size and pace of quantitative easing is a disappointment or not, it is relieved that the uncertainty is over,” said Kathleen Brooks, research director at Gain Capital Group LLC. “The removal of FOMC event risk is like a weight lifted from the market’s shoulders, which makes risky assets more attractive. The fall in the VIX may point to S&P gains.”
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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