U.S. stocks rallied, breaking a four-week losing streak for the Standard & Poor’s 500 Index, as Federal Reserve Chairman Ben S. Bernanke indicated the economy isn’t deteriorating fast enough to warrant any immediate stimulus amid valuations close to the lowest in 2 1/2 years.
Caterpillar Inc. (CAT) and Alcoa Inc. (AA) paced gains among companies most-tied to the economy, adding at least 2.2 percent. Technology shares rose the most in the S&P 500, with Cisco Systems Inc. (CSCO) and Intel Corp. (INTC) advancing more than 1.5 percent. Tiffany & Co. (TIF), the world’s second-largest luxury jewelry retailer, jumped 9.4 percent after reporting profit that beat analysts’ estimates and raising its earnings forecast.
The S&P 500 rallied 1.5 percent to 1,176.80 at 4 p.m. in New York after slumping 2 percent following Bernanke’s remarks. The benchmark gauge for American equities has risen 4.7 percent since Aug. 19 and had the first weekly gain since July. The Dow climbed 134.72 points, or 1.2 percent, to 11,284.54 today.
“This is exactly what the market wanted,” Keith Springer, who oversees $120 million as the president of Springer Financial Advisors in Sacramento, California, said in a telephone interview. “It’s telling you there’s no reason to panic because they have the impression that the economy is getting better. If he threw more money at the economy, it would have given the impression that things were out of control.”
Stocks gyrated following the Bernanke speech, in which he said the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said U.S. economic data aren’t pointing to a recession.
“Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said in prepared comments.
Bernanke said a second day has been added to the next Federal Open Market Committee meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response. He didn’t close the door in today’s speech to options he has previously discussed, including a third round of government bond buying.
“The one bombshell in the speech is that he did say the September meeting is going to be a two-day meeting, which has two implications,” said John Canally, who helps oversee $340.8 billion as an economist and investment strategist at LPL Financial Corp., said in a telephone interview from Boston. “One, it may mean they’re going to spend more time further refining the tool they’ve already outlined. Or it means they have time to talk about something they haven’t done.”
Threats facing the economy aren’t as grave as they were when Bernanke pledged new stimulus at Jackson Hole in August 2010, according to Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc. Solutions such as the so-called quantitative easing program to purchase Treasury notes may be less effective now, said Koesterich, whose firm oversees $3.66 trillion.
“This is pretty much what we expected,” he said. “The economic data points are likely going to continue to be weak, but the market already knows that. If you have a period when economic data is poor, but not as bad as people expect, you can actually see some relief in the market.”
Rising consumer prices and signs the economy is still growing may be restricting Bernanke’s options. Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production.
Last year, Bernanke hinted that the Fed might embark on a second round of asset purchases to bolster the recovery, kicking off a 30 percent rally in the S&P 500 that ended in a three-year high on April 29.
Policy makers this month pledged to keep their benchmark interest rate near zero until at least mid-2013 and said they “discussed the range of policy tools” available. Bernanke told Congress on July 13 the Fed has stimulus options. They may include buying additional securities, increasing the average maturity of its bond portfolio, lowering the interest rate on excess reserves and pledging to keep its balance sheet near a record high for a longer period of time.
“There’s a risk appetite that’s building in the market,” Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which oversees $3.8 billion, said in a telephone interview. “At some point people are going to see interest rates are going to stay at zero for some time so we should probably buy financial assets.”
This year’s decline in the S&P 500 left the benchmark gauge for U.S. equities at 12.7 times reported earnings yesterday, more than 20 percent below its five-decade average. Barton Biggs, founder of hedge fund Traxis Partners LP, said last week that valuations are so low they could withstand a 15 percent decline in profits.
Earnings for companies in the index may rise 18 percent this year, according to the average estimate of analysts surveyed by Bloomberg. Economists predict gross domestic product will expand 1.75 percent this year and 2.35 percent in 2012, according to a survey of 56 respondents conducted by Bloomberg. GDP climbed at a 1 percent annual rate from April through June, down from a 1.3 percent prior estimate, revised Commerce Department figures showed today in Washington.
The Morgan Stanley Cyclical Index of companies most- dependent on economic growth rallied 2.4 percent. The Dow Jones Transportation Average, also a proxy for the economy, added 2.7 percent. Caterpillar, the world’s largest construction and mining-equipment maker, gained 2.3 percent to $85.16. Alcoa advanced 2.3 percent to $11.86.
Technology shares in the S&P 500 rallied 2.3 percent, the biggest gain within 10 industries. Cisco, the world’s largest maker of networking equipment, increased 1.6 percent to $15.32. Intel climbed 1.8 percent to $19.77.
Tiffany gained 9.4 percent to $69.01. Sales growth in the current quarter is exceeding estimates, helped by the Asia- Pacific region and the Americas, Chief Executive Officer Michael Kowalski said in the statement. The company has also been able to “absorb” precious metal and gemstone cost increases, he said.
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