Calm is pervading the U.S. stock market like no time in seven years as stimulus from the European Central Bank and improving employment lifted equities for a third week, sending benchmark indexes to all-time highs.
The Chicago Board Options Exchange Volatility Index, also known as VIX (VIX), slipped 5.9 percent for the week to 10.73, the lowest level since February 2007. The Standard & Poor’s 500 Index climbed 1.3 percent to 1,949.44 for a third weekly gain, the longest stretch since November. The Dow Jones Industrial Average (INDU) added 207.11 points, or 1.2 percent, to 16,924.28.
Volatility is diminishing, with the VIX trading within two points of an all-time low, as confidence grew that a flood of central-bank monetary stimulus worldwide will propel the global economy, extending the five-year bull market in equities. Data showing payrolls pushed past their pre-recession peak for the first time reinforced speculation that the U.S. is recovering from a first-quarter contraction.
“What’s been the backbone of the financial markets is the concept that central banks are accommodating to the fullest extent possible,” Jim Welsh, a portfolio manager at Forward Management LLC in San Francisco, said in a phone interview. His firm oversees $5.5 billion. “The belief that has evolved from that is that the market is almost invulnerable as long as the banks are doing that.”
Equities advanced from Spain to Japan over the five days as tensions eased in the Ukraine and the ECB became the first major central bank to take one of its main rates negative. The MSCI All-Country World Index climbed 1.2 percent to the highest level since October 2007.
U.S. stocks extended gains on the final day of the week as figures from the Labor Department showed the U.S. economy added 217,000 jobs in May. It marked the fourth consecutive month employment increased by more than 200,000, the first time that’s happened since early 2000. The jobless rate unexpectedly held at an almost six-year low of 6.3 percent.
Federal Reserve officials are watching the labor market as they move to complete their bond-purchase program late this year. Central-bank stimulus has helped propel the S&P 500 higher by 188 percent from its bear-market low in March 2009.
The Fed said in its Beige Book business survey during the week that the economy expanded at a modest to moderate pace last month as auto sales led household spending and the labor market improved.
The S&P 500 has rebounded 7.4 percent since a selloff in small-cap and Internet shares spread to the broader market, dragging the index to a two-month low in April. The Russell 2000 (RTY) Index of smaller companies rallied 2.7 percent for the week, its best performance since February. It has recovered 6.3 percent from a May low.
U.S. stocks continued to set records amid low volume and a narrow trading range. The S&P 500 hasn’t had a move of more than 1 percent at the close for 35 straight days. That’s the longest stretch since a 38-day run ended in January 2007. About 1.8 billion shares traded each day in S&P 500 companies last month, the fewest since 2008, according to data compiled by Bloomberg.
Hedge funds are betting the stock-market tranquility that’s stifling trading and hurting bank profits will be around for a while. Large speculators have added bets on lower volatility and were net short about 82,000 contracts on VIX futures last month, the most since October, data from the Commodity Futures Trading Commission show. The strategy will be profitable should the VIX continue its 22 percent retreat this year.
“Over the past year, when the market was on new highs, customers were very aggressive buyers of VIX calls and call spreads,” Mark Caffray, who brokers contracts on the index for clients at Chicago-based PTR Inc., said in an interview. “There really has not been aggressive buyers and the market has continued to make new highs. If the VIX keeps going lower, there is a good chance the market will continue higher.”
David Tepper, the founder of $20 billion hedge-fund firm Appaloosa Management LP, expressed renewed confidence in equities. He said in a June 5 interview with CNBC that his concerns over the market have eased. On May 15, Tepper described the market as “kind of dangerous” and expressed nervousness because the economy wasn’t expanding at a sufficient pace.
Bulls also grew among newsletter writers. The proportion of optimistic advisors in Investors Intelligence’s latest weekly survey increased to 62.2 percent, the most since January 2005.
Companies whose earnings are most tied to economic swings posted better returns for the week, with financial, industrial and consumer shares rising at least 1.8 percent. That marked a reversal from the first five months of the year, when defensive stocks such as utilities and health care outperformed.
“Cyclical sectors seem to be coming back in favor,” Terry Sandven, chief equity strategist at Minneapolis-based U.S. Bank Wealth Management, which oversees $120 billion, said by phone. “The economy is improving and the Fed will remain accommodative for the near future and that sets the stage for equities to trend higher.”
The Stoxx Europe 600 Index gained 0.9 percent for the week, reaching its highest level in six years, as the ECB lowered interest rates and unveiled a package of cheap loans for the euro zone’s banks. The equity gauge has advanced for eight consecutive weeks, its longest winning streak since 2012, when the central bank’s president, Mario Draghi, said “the ECB is ready to do whatever it takes to preserve the euro.”
The MSCI Asia Pacific Index gained 1 percent for its fourth weekly gain, finishing at the highest level since October. Japan’s Topix index climbed 2.8 percent as Prime Minister Shinzo Abe asked Norihisa Tamura, the minister who oversees the 128.6 trillion yen ($1.3 trillion) Government Pension Investment Fund, to conduct an early review of its portfolio.
Among American shares, Joy Global (JOY) Inc. jumped 12 percent for the second-largest advance in the S&P 500. The maker of mining equipment posted earnings that topped forecasts and said it expects global growth to drive demand for commodities. Bigger rival Caterpillar Inc. climbed 5.8 percent for the week.
Broadcom (BRCD) Corp. surged 19 percent, the most in the S&P 500. The company, struggling to make a dent in Qualcomm Inc.’s lead in chips that connect smartphones to mobile networks, said it’s giving up on that business.
Hillshire Brands Co. rallied 11 percent. The maker of Jimmy Dean sausages and Ball Park hot dogs authorized takeover talks with Tyson Foods Inc. and Brazil’s JBS SA, which owns 75 percent of Pilgrim’s Pride Corp., as a $6.7 billion bidding war for Hillshire escalated.
Protective Life (PL) Corp. surged 33 percent after Dai-Ichi Life Insurance Co. agreed to buy the life insurer for 582.2 billion yen ($5.7 billion).
Dollar General Corp. climbed 7.8 percent. The discount retailer said in a conference call that it plans to spend $1.1 billion on share buybacks.