U.S. Equities Advance as Small Companies Rally Before Fed

U.S. stocks rose, extending a two-day advance in the Standard & Poor’s 500 Index, as smaller companies rallied before the Federal Reserve’s monetary policy decision tomorrow.

E*Trade Financial Corp. and Charles Schwab Corp. rallied more than 5.4 percent amid a Senate hearing on broker incentives. Medtronic Inc. (MDT) advanced 2.6 percent as brokers including Morgan Stanley and Credit Suisse Group AG raised their ratings on the company. Netflix Inc. and Expedia Inc. jumped more than 3.1 percent as analysts recommended buying the shares. Edwards Lifesciences Corp. rose 4.6 percent after receiving approval for a heart device.

The S&P 500 (SPX) gained 0.2 percent to 1,941.99 at 4 p.m. in New York. The Dow Jones Industrial Average added 27.48 points, or 0.2 percent, to 16,808.49. The Russell 2000 Index of smaller companies rose 0.8 percent. About 5.7 billion shares changed hands today on U.S. exchanges, 7.5 percent below the three-month average.

“Overall, you’re still in a market environment where the path of least resistance is up,” John Canally, an economic strategist at LPL Financial Corp., said in a phone interview from Boston. His firm oversees about $447.1 billion. “Another bump tomorrow could be the FOMC, although the outcome is largely already priced in.”

U.S. stocks rose 0.1 percent yesterday as corporate deals and growth in American manufacturing overshadowed escalating tension in Iraq. The S&P 500 dropped 0.7 percent last week as Sunni insurgents in Iraq occupied more territory and oil prices jumped to an eight-month high.

Index Records

The benchmark index has advanced 5.1 percent this year, reaching a record on June 9, as equities were boosted by better-than-forecast economic data and monthly asset purchases by the Fed. The S&P 500 is trading at 16.4 times the projected earnings of its members, up from 15.5 times at the beginning of the year.

The Russell 2000 (RTY) closed at its highest level in more than two months. It has rallied 7.4 percent from a May low, rebounding after a selloff in small-cap and Internet stocks. The gauge is 2.7 percent away from its all-time high reached in March.

Equities fell earlier today as data showed the cost of living in the U.S. rose more than forecast, reflecting broad-based gains that signal inflation will move closer to the Fed’s goal. The consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month.

Inflation Reading

“Probably the most troubling number for investors is the CPI number,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $65 billion in assets, said by phone. “Both numbers put those inflation readings around the Fed’s target policy of 2 percent. That to me suggests that the Fed, in looking at that, could say we run the risk of inflation being hot and could suggest pulling forward an increase of rates.”

A pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth, giving Fed officials reason to continue to scale back their unprecedented bond-buying program. Continued hiring and faster wage gains will be needed to boost demand and enable consumers to cope with higher prices.

Housing Starts

A Commerce Department report showed builders broke ground on 1 million U.S. homes in May, a 6.5 percent decline. The median forecast of 78 economists surveyed by Bloomberg projected May housing starts would come in at a 1.03 million pace. Permits decreased 6.4 percent to a 991,000 annualized rate.

The Fed began its two-day policy meeting today in Washington. The Federal Open Market Committee will reduce the pace of monthly asset purchases by $10 billion to $35 billion, economists project. Some 62 percent of 58 economists in a Bloomberg survey predict the Fed will halt bond buying at its October meeting.

Officials led by Chair Janet Yellen will release a new set of quarterly forecasts for unemployment, inflation, economic growth and the benchmark federal funds rate at the conclusion of their meeting tomorrow. In March, officials predicted their target rate, now close to zero, would be 1 percent at the end of 2015 and 2.25 percent a year later.

The Chicago Board Options Exchange Volatility Index, known as the VIX, lost 4.7 percent to 12.06. The measure of volatility has dropped 12 percent this year.

Five out of 10 major industries in the S&P 500 increased, with financial stocks adding 0.9 percent for the largest gain.

Online Brokers

Online brokers rallied as the Senate’s Permanent Subcommittee on Investigations met for a hearing to examine conflicts of interest embedded deep in the plumbing of equity markets. U.S. stock exchanges called for greater public disclosure or elimination of incentives and fees that lawmakers said favor the interests of high-speed traders over other investors.

E*Trade rose 7.7 percent to $22 and Charles Schwab climbed 5.5 percent to $27.30. TD Ameritrade Holding Corp. advanced 4.7 percent to $31.58. Exchange operators also rose, with Intercontinental Exchange Inc. adding 1.1 percent to $194.66 and Nasdaq OMX Group Inc. increasing 1.9 percent to $37.25.

Medtronic gained 2.6 percent to $61.58. Morgan Stanley upgraded the maker of medical devices to overweight, similar to a buy recommendation, from equal weight, citing potential returns from its deal to buy Covidien Plc. Credit Suisse and RBC Capital Markets also recommended buying the stock.

Netflix, Expedia

Netflix jumped 3.1 percent to $443.65 as Morgan Stanley analyst Benjamin Swinburne recommended buying shares of the video-streaming service. Netflix has climbed 21 percent this year after soaring 298 percent in 2013.

Expedia jumped 4.1 percent to $77.62, the highest level since February. Susquehanna Financial Group LLLP analyst Brian Nowak upgraded the shares to positive, the equivalent of a buy, from neutral. He increased his price target to $90 a share from $79, citing likely growth in Travelocity, Trivago and Expedia’s core business.

Edwards Lifesciences rose 4.6 percent to $82.06 after the U.S. Food and Drug Administration approved the company’s Sapien XT heart valve.

To contact the reporters on this story: Callie Bost in New York at cbost2@bloomberg.net; Jacob Barach in New York at jbarach1@bloomberg.net

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

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