U.S. Stocks Rise to Five-Year Highs Amid Merger Optimism

U.S. stocks advanced, sending benchmark indexes to their highest levels in five years, on increasing optimism over dealmaking and a report showing rising investor confidence in Germany.

Office Depot Inc. soared 9.4 percent and OfficeMax Inc. surged 21 percent as a person familiar with the matter said the companies have discussed a merger and may announce a deal as early as this week. Bank of America Corp. and Citigroup Inc. rose more than 1.3 percent as financial shares rallied. Google Inc. jumped 1.8 percent, surpassing $800 for the first time.

The Standard & Poor’s 500 Index increased 0.7 percent to 1,530.94 at 4 p.m. in New York. The Dow Jones Industrial Average advanced 53.91 points, or 0.4 percent, to 14,035.67. Both indexes closed at their highest levels since October 2007. About 6.5 billion shares exchanged hands on U.S. exchanges, 6.5 percent above the three-month average. U.S. equity markets were closed yesterday for the Presidents Day holiday.

“More deals out there do create a good sentiment,” Kevin Divney, chief investment officer at Beaconcrest Capital Management in Boston, said in an phone interview. “CEOs now are looking further out, and that’s been the issue the past four years. If we can extend horizons it makes for better strategic decisions.”

The S&P 500 completed its seventh consecutive weekly advance on Feb. 15, climbing 0.1 percent for the five days amid optimism over corporate merger activity and better-than-estimated economic data. The benchmark gauge is 2.2 percent below its 2007 all-time high of 1,565.15, while the Dow is 0.9 percent from its record high of 14,164.53.

Deal Activity

Almost $40 billion in deals were announced in the U.S. on Feb. 14, bringing the total this month to more than $140 billion, according to data compiled by Bloomberg. That already surpassed the total of $99.6 billion during the first two months of 2012.

The S&P 500 has climbed 7.3 percent in 2013 as U.S. lawmakers agreed on a compromise federal budget and earnings topped analyst estimates. About 71 percent of the 402 companies in the S&P 500 that have released results in the earnings season have exceeded profit projections, and 66 percent have beaten sales estimates, data compiled by Bloomberg show.

German investor confidence jumped more than economists forecast in February to the highest in almost three years, data showed today, adding to signs that Europe’s largest economy is rebounding from its slump.

The Chicago Board Options Exchange Volatility Index reached its lowest level since April 2007, slipping 1.2 percent to 12.31. Declines in the VIX, as the gauge of S&P 500 Index volatility is known, came before gains in the S&P 500 in 2009 and at the end of 2011.

Banks Rally

Nine out of 10 groups in the S&P 500 advanced, with consumer-staples and energy shares climbing at least 1 percent. The KBW Bank Index added 0.6 percent, as Bank of America gained 1.3 percent to $12.19. Citigroup jumped 1.5 percent to $44.50, its highest level since May 2011, while JPMorgan Chase & Co. reached a more than four-year high after adding 1.2 percent to $49.45.

Office Depot, the second-largest office-supplies retailer, added 43 cents to $5.02 and OfficeMax rallied $2.25 to $13. The companies have discussed a stock swap that would create a single office-supply retailer to compete with Staples Inc., said the person familiar with the matter, who asked not to be identified because the talks remain private. Office Depot has explored options since September, when activist fund Starboard Value LP became its largest shareholder.

Staples climbed 13 percent to $14.65 for the biggest gain in the S&P 500.

Google Record

Google advanced $13.96 to $806.85, the highest since the company went public in August 2004. Google is benefiting as more advertisers place promotions on its website, buoyed by the growing number of users who access the service on smartphones and tablets.

Best Buy Co. gained 2.7 percent to $17.33 after Alan Rifkin, an analyst at Barclays Plc, raised the retailer of electronic goods to overweight, the equivalent of buy, from equal weight.

“We believe Best Buy is taking the necessary steps to improve operations by cutting costs out and driving efficiencies,” Rifkin wrote in a report today. “We are confident that management will work to defend share.”

General Mills Inc. added 1.9 percent to $45.43. The maker of Cheerios cereal said profit would rise at a high single-digit percentage rate in fiscal 2014 and reiterated its earnings forecast for this year. Analysts project an increase of 8 percent to $2.90 per share, according to the average of estimates compiled by Bloomberg.

Sealed Air

Sealed Air Corp. jumped 9 percent to $21.15. The packaging manufacturer, based in Elmwood Park, New Jersey, posted fourth-quarter revenue of $1.98 billion, topping the $1.94 billion average estimate in a Bloomberg survey of analysts.

An index of homebuilders dropped 1.2 percent, with nine of its 11 members declining. The National Association of Home Builders/Wells Fargo builder confidence index fell to 46 from January’s 47, a report from the Washington-based group showed today. The median forecast in a Bloomberg survey of 50 economists called for a rise to 48.

PulteGroup Inc. tumbled 1.8 percent to $19.95 and D.R. Horton Inc. lost 1.6 percent to $23.29.

Humana Inc. tumbled 6.4 percent to $73.01 for the biggest drop in the S&P 500. The second-biggest private Medicare insurer said the U.S. government’s preliminary Medicare Advantage payment rates were less than the company anticipated. The proposed rates also sent other insurers’ shares down. UnitedHealth Group Inc., the largest U.S. health insurance provider, fell 1.2 percent to $56.66. Cigna Corp. lost 1.1 percent to $60.43.

Macau Gambling

Casino companies retreated as HSBC Global Research said Macau’s gambling revenue lagged behind its projection for the first 17 days of February. VIP, or high-stakes, gamblers may have stayed away to avoid crowds during the New Year holiday, HSBC said.

Wynn Resorts Ltd. dropped 2.1 percent to $120.39 after CLSA Ltd. downgraded Wynn Macau, the Hong Kong-listed unit of billionaire Steve Wynn’s Las Vegas-based company, to outperform from buy. Las Vegas Sands Corp., which operates casinos and convention centers in the U.S., Macau and Singapore, tumbled 3.1 percent to $51.25.

Growing Confidence

Price swings in U.S. stocks are narrowing the most since the Great Depression, a signal of reviving investor confidence that has fueled a four-year-old bull market.

Average daily price moves for the S&P 500 have fallen to 0.43 percent in 2013 from an average 1.08 percent in the past five years, the steepest decline for any corresponding period since the 1930s, according to data compiled by Bloomberg. The last time the annual average was this low was 1995, when the S&P 500 surged 34 percent and doubled in the following four years. Stocks gain an average of 17 percent during years when the gyrations are so small, the data going back to 1928 show.

The combination of declining volatility and the best start to a year since 1997 is prompting bears to warn that investors are growing complacent as the rally ages. Bulls cite smaller fluctuations as another reason to buy, on top of rising earnings forecasts, below-average valuations and the biggest deposits in equity mutual funds in nine years.

“Switching from net outflows to net inflows has been a big part of volatility being dampened,” Michael Shaoul, the chairman and chief executive officer at Marketfield Asset Management, said in a Feb. 14 phone interview.