U.S. Stocks Rise to Record After Fed Plans Stimulus Cuts
U.S. stocks rose, sending benchmark indexes to all-time highs, after the Federal Reserve said it will reduce the pace of its monthly bond purchases and expressed confidence in the labor market recovery.
Homebuilders rallied after the Fed said it may hold interest rates near zero even if unemployment falls below the 6.5 percent rate the central bank previously cited as a likely catalyst for an increase. CVS Caremark Corp. jumped 4.3 percent after boosting its dividend. Jabil Circuit Inc. slumped 21 percent as earnings missed analysts’ estimates.
The Standard & Poor’s 500 Index (SPX) advanced 1.7 percent to 1,810.65 at 4 p.m. in New York, surpassing its previous record close reached on Dec. 9. The Dow Jones Industrial Average surged 292.71 points, or 1.8 percent, to an all-time high of 16,167.97. Both gauges posted their biggest gains in two months. About 8.1 billion shares changed hands on U.S. exchanges, the busiest trading since September.
“With the Fed acknowledging the economy continues to recover, and reiterating low rates and accommodative policy will remain for quite some time, it reinforces the Goldilocks scenario of a Fed backstop and equities are running with it,” Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said in an interview. His firm oversees $290 billion.
The central bank announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Federal Open Market Committee said today.
The policy makers added that it “likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.
The jobless rate fell to 7 percent in November, a five-year low, as employers added a greater-than-forecast 203,000 workers to payrolls. The central bank’s preferred gauge of inflation, excluding food and energy, climbed 1.1 percent in the year through October. It has not breached 2 percent since March 2012.
A majority of economists surveyed by Bloomberg on Dec. 6 estimated that the central bank would delay tapering until next year. Even so, 34 percent of the respondents projected the Fed would announce reductions in bond purchases today, the survey showed, double the percentage in a Nov. 8 poll.
Bernanke is scheduled to retire at the end of January. Vice Chairman Janet Yellen, who may win Senate confirmation this week to replace him, has been a supporter of the bond-buying policy. The FOMC next meets Jan 28-29.
“While the Fed explicitly states they’re trimming their asset purchases, they continue to re-affirm their expectations of a ‘highly accommodative’ stance on monetary policy and exceptionally low rates,” said Yousef Abbasi, market strategist at JonesTrading Institutional Services LLC, a Westlake, California-based broker. “No one seems unnerved even though the majority hadn’t forecasted a taper in December.”
The rally today erased the S&P 500’s monthly loss, leaving the gauge 0.3 percent higher in December. The final month of the year has been the second-best for U.S. equity returns, according to data compiled by Bloomberg that starts in 1928. The average gain for the month is 1.5 percent, more than twice the overall monthly mean of 0.6 percent.
The equity benchmark gauge has surged 27 percent this year, on course for the biggest annual gain since 1997. Three rounds of monetary stimulus have driven stocks to a rally that lifted the S&P 500 up 168 percent from a 12-year low in 2009.
The Chicago Board Options Exchange Volatility Index (VIX) plunged 15 percent to 13.81. The guage’s biggest drop in two months erased a gain of 3.3 percent earlier today and halted a six-day rally.
Health-care and financial stocks each surged 2.4 percent as a group, as all 10 main S&P 500 industries gained at least 0.8 percent. Technology shares added 0.1 percent for the worst performance.
An S&P index of homebuilders rallied 4.2 percent as all 11 members advanced. The Fed’s low interest rates have prompted consumers to buy homes or refinance existing mortgages, sparking a recovery in the housing market that was at the center of the financial crisis.
Data today showed builders broke ground on more homes in November than at any time in over five years as growing demand helped the industry overcome rising U.S. mortgage rates.
Lennar Corp. (LEN) climbed 6.3 percent to $37.43. The second-biggest U.S. homebuilder by market value reported quarterly earnings that topped estimates as it sold more homes and increased profits.
CVS Caremark (CVS) Corp. rose 4.3 percent to a record $69.69. The largest supplier of prescription drugs in the U.S. boosted its dividend by 22 percent and approved a share buyback for as much as $6 billion.
Gilead Sciences Inc. jumped 5 percent to $73.59. The company said it plans to file a new drug application for a hepatitis C virus treatment in the first quarter after three phase 3 studies.
Jabil plunged 21 percent to $15.67, the lowest since August 2011. The electronics supplier, whose top two customers were Apple (AAPL) Inc. and BlackBerry Ltd. in the year ended Aug. 31, said fiscal first-quarter earnings missed estimates and forecast second-quarter revenue that was below some analysts’ estimates.
Apple dropped 0.8 percent to $550.77. Citigroup Inc. analyst Glen Yeung said Jabil’s forecast could be indicative of a steeper fall-off in iPhone production compared with last year, suggesting a risk to the company’s estimate for shipments of 38 million phones in Apple’s second quarter.
Separately, China Mobile Ltd., the world’s largest phone company, has yet to reach an agreement with Apple to offer the iPhone, the official China Daily newspaper reported today.
Ford (F) Motor Co. declined 6.3 percent to $15.65. The second-largest U.S. automaker, entering its busiest year for new car and truck introductions ever, said that the cost of bringing those vehicles to market will lead to a decline in its pretax profit next year. Ford forecast that it will earn $7 billion to $8 billion next year after an estimated $8.5 billion pretax profit for 2013.
Micron (MU) Technology Inc., the largest U.S. maker of memory chips, sank 4.8 percent to $21.81 amid concern rising supply will hurt product prices. SK Hynix Inc. plans to build a new factory in South Korea to meet the growing demand for mobile devices, according to two people familiar with the matter.
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