S&P 500 Advances to 2-Month High Amid Optimism on Budget

U.S. stocks advanced, sending the Standard & Poor’s 500 Index to the highest level in two months, amid signs of progress in efforts by President Barack Obama and Republicans to reach agreement on a new budget in Washington.

An index of homebuilders gained 2.3 percent as confidence among U.S. homebuilders climbed in December to the highest in more than six years. Bank of America Corp. (BAC) and Morgan Stanley rose more than 3.1 percent to pace gains in financial shares. Apple Inc. (AAPL), the most valuable company, added 2.9 percent.

The S&P 500 rose 1.2 percent to 1,446.79 at 4 p.m. in New York. It has gained 15 percent so far in 2012. The Dow Jones Industrial Average added 115.57 points, or 0.9 percent, to 13,350.96 today. About 7.4 billion shares changed hands on U.S. exchanges, 20 percent above the three-month average.

“There is certain optimism that it could potentially be done before the end of the year and that would be a very positive sign to the market,” Philip Tasho, chief investment officer at Alexandria, Virginia-based Tamro Capital Partners LLC, which manages about $1.8 billion, said in a phone interview. “Once the solutions are in the rear view mirror in terms of fiscal policy, we will simply look forward. It’s a blip in the long-term trend.”

The S&P 500 sank as much as 7.7 percent from its 2012 high in September as Obama’s re-election set up a budget showdown with the Republican-controlled House of Representatives. The benchmark gauge has climbed 6.9 percent since its November low amid optimism a compromise will be reached to avoid more than $600 billion in automatic tax increases and spending cuts.

Revised Plan

Obama lowered his tax revenue demand by $200 billion and offered to start tax rate increases at $400,000 in income instead of $250,000, moving closer to a budget deal with House Speaker John Boehner.

The president’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama wants a large enough debt ceiling increase for the next two years and would accept a new inflation yardstick that would reduce Social Security cost-of-living increases, said the person, who sought anonymity.

Boehner said he will push a budget “plan B” measure that will include tax increases on income of more than $1 million a year, while he continues to negotiate with the president. Obama’s administration and other Democrats immediately rejected the proposal as inadequate.

‘It’s Real’

“People have been very fearful to move into stocks and this might be one of the things to get them go back to stocks,” Brian Gendreau, a market strategist at El Segundo, California- based Cetera Financial Group Inc., said in a telephone interview. The firm has about $20 billion in assets under management. “We see a pickup in housing. The consumer continues to spend. The recovery is there, it’s real.”

All 10 groups in the S&P 500 advanced today as energy, technology and financial companies gained at least 1.4 percent. The Morgan Stanley Cyclical Index rose 1.8 percent to the highest level since July 2011. The Dow Jones Transportation Average jumped 1.6 percent to the highest level since May.

An S&P index of homebuilders rallied 2.3 percent to the highest level since Oct. 19. The National Association of Home Builders/Wells Fargo index of builder confidence increased to 47, the highest since April 2006, from a revised 45, the Washington-based group reported today.

Lennar Corp. climbed 2.4 percent to $39.71. D.R. Horton Inc. added 2 percent to $20.08 and PulteGroup Inc. gained 3.2 percent to $18.61.

Banks Rally

Bank of America, the second-largest U.S. lender by assets, advanced 3.3 percent to $11.36. Morgan Stanley rose 3.2 percent to $19.12.

Apple, the world’s most valuable company, gained 2.9 percent to $533.90. Bank of America said the selloff of the stock could be overdone. Shares fell 4.4 percent last week as UBS AG cut its price estimate to $700 from $780, citing concern that growth may slow for the iPhone and iPad.

At least five analysts have cut their price targets for Apple since Dec. 16, with some saying Apple’s purchases from suppliers indicate sales of iPhones and iPads, the company’s largest sources of revenue and profit, may not meet projections.

The reports from Citigroup Inc. (C), Pacific Crest Securities, Mizuho Securities USA, BMO Capital Markets and Canaccord Genuity mark a reversal from earlier this year, when analysts were racing to issue upbeat predictions, with at least two saying Apple would top $1,000. Instead, the shares have dropped more than 25 percent from a September record amid speculation the iPhone is saturating the market, ratcheting up pressure on Chief Executive Officer Tim Cook to introduce a new hit product.

Patent Lawsuits

Separately, Samsung Electronics Co. said today that it will withdraw patent lawsuits targeting Apple’s use of its technology in European countries.

Arbitron Inc. (ARB) rallied 24 percent to $47.03. Nielsen Holdings NV agreed to buy Arbitron for about $1.26 billion, adding U.S. radio audience ratings to its television data as more users listen to and watch programs on the Internet and mobile devices.

Tenet Healthcare Corp. rallied 4.1 percent to $32.47, the highest since 2006. The hospital chain was rated overweight, an equivalent of buy, in new coverage at JPMorgan Chase & Co.

Smith & Wesson Holding Corp. (SWHC) led a decline in stocks of firearms makers as Cerberus Capital Management LP, the New York- based investment firm that owns the largest U.S. gunmaker, said it will put the company up for sale, acting four days after one of its rifles was used in the Connecticut school shootings that left 26 people dead.

Prohibited Guns

Cerberus said it will seek to sell Freedom Group Inc. just hours after California Treasurer Bill Lockyer said he’ll propose that the state’s public pension funds, the two largest in the U.S., divest investments in firearm manufacturers that make guns prohibited under state law.

Smith & Wesson slid 10 percent to $7.79, plunging 18 percent over three days. Sturm Ruger & Co. declined 7.7 percent to $40.60.

General Electric Co. (GE) slipped 1.1 percent, the most in the Dow, to $21.69. The world’s largest jet-engine maker may reach an agreement to buy Avio SpA, an Italian supplier of aerospace components, from Cinven Ltd. this week, according to two people familiar with matter. A deal may be valued at about 3 billion euros ($4 billion), said one of the people, who asked not to be identified because talks are private.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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