U.S. Stocks Get Biggest Fed Gain Over Two Days Since 2011

U.S. investors celebrated a reprieve from energy angst and Russia with the biggest post-Federal Reserve rally in three years.

The Standard & Poor’s 500 Index surged 4.5 percent, erasing four-fifths of the seven-day decline that began Dec. 5 and wiped out about $1 trillion of equity value. The gauge pulled within 1 percent of its all-time high as Apple Inc., Berkshire Hathaway Inc. and Johnson & Johnson led the advance.

After two weeks in which traders grew obsessed with headlines about OPEC and Russia’s central bank, the rally was ignited by a more familiar institution: Janet Yellen’s Federal Reserve. More than 500 points has been added to the Dow Jones Industrial Average in the nearly nine hours U.S. exchanges have operated since she pledged patience in raising interest rates.

“It’s not as if there was some magnificent news, it was really about the unwinding of stress and concerns about oil and Russia just quieting down,” Jonathan Golub, chief U.S. market strategist at RBC Capital Markets LLC, said by phone. “The Fed told us what we believed already, which is that they’re going to move in the middle of next year and when they do they’ll do it slowly. That allowed markets to calm down.”

The Fed replaced a vow to hold rates low for a “considerable time” with a commitment to be patient on the timing of any increase. American equities have almost tripled during the 5 1/2 year bull market driven by the central bank’s three rounds of bond buying to stimulate the economy and borrowing costs near zero.

Investor Anxiety

The rebound in stocks began after a measure of investor anxiety surged to levels not seen since the financial crisis. For five days through Dec. 16, the Chicago Board Options Exchange Volatility Index closed 20 percent above two-standard deviations of its average price in the past four weeks, data compiled by Sundial Capital Research Inc. show. That’s the longest stretch since October 2008.

The options gauge known as the VIX surged 58 percent over that time period. During the past two days it decreased almost 29 percent, the largest retreat since January 2013.

The S&P 500’s 14-day relative-strength index fell to 30.8 on Dec. 16, the lowest level since Oct. 16, the day after the index halted a 7.4 percent decline, according to data compiled by Bloomberg. RSI measures the degree to which gains and losses outpace each other, and some analysts consider a reading below 30 as indicating an asset has fallen too far.

“This was a buying opportunity for the buying the dip crowd -- when the buying dip mentality took over, people came back pouring in again,” Sam Wardwell, an investment strategist at Pioneer Investment Management Inc. in Boston, said by phone. His firm manages about $250 billion. “If you look at the economic data, there is nothing that suggests this decline in oil prices is hurting the U.S. economy.”

Economic Data

Reports during the day showed the number of Americans filing for unemployment benefits fell last week, the Bloomberg Consumer Comfort Index climbed to the highest reading since mid-November 2007, and the Conference Board’s index of leading indicators rose in November for a third straight month.

The last time U.S. shares got a bigger boost from a Federal Open Market Committee meeting was when the S&P 500 climbed 4.7 percent on Aug. 9, 2011. Unlike this week, momentum from that announcement failed to last and the index erased almost all of its gains the next day.

The S&P 500 hasn’t sustained an increase of this size through a second session since 2001. Stocks climbed 5.2 percent after an FOMC meeting on April 18 of that year, with the S&P 500 climbing 3.9 percent on the day of the meeting and 1.3 percent the following day.

Fifth Recovery

U.S. stocks are on the verge of completing the fifth recovery this year from a decline of 4 percent or more, just 13 days after it started. In comparable drops beginning in January, April, July and September, the index needed about a month to erase losses, data compiled by Bloomberg show.

“This action by Yellen and company now sent a very positive message to the market that said the U.S. economy is recovering and it doesn’t appear that it will be derailed,” John Stoltzfus, chief market strategist at Oppenheimer & Co., said in a phone interview. “It’s another time since the turnaround of the crisis of 2008 that transparency really pays off for the Fed.”

Equities are rebounding from a drop that coincided with a 15 percent retreat in West Texas Intermediate crude between Dec. 5 and Dec. 16. The freefall heightened concerns over a Russian economy already burdened by sanctions imposed by the U.S. and Europe in response to the conflict in Ukraine.

Ruble’s Plunge

Russia’s central bank predicted the nation, whose biggest export is oil, could slip into recession. The ruble plunged past 80 per dollar for the first time even after policy makers boosted interest rates to an 11-year high.

S&P 500 energy producers tumbled 8 percent over the stretch through Dec. 16, while chemical and mining companies lost 7.4 percent.

While oil and gas companies from Noble Corp. to Nabors Industries Ltd. and Devon Energy Co. paced the advance since Dec. 17, rising more than 10 percent, they were bit players in yesterday’s surge. Reflecting optimism about the economy spurred by Yellen’s comments, technology makers, industrial companies, banks and health-care stocks had the biggest gain on day two, rising a minimum of 2.4 percent.

Among industries, analysts estimate that earnings will grow fastest next year for consumer discretionary companies, at 14.1 percent, followed by commodity producers at 14 percent and technology makers at 13.2 percent. Energy companies may see profits fall more than 13 percent in 2015, a Bloomberg survey of analysts show.

“There’s a lot of liquidity at work here because you had oil down, so obviously people were trying to de-risk and sell what they could, and a lot of it was equities,” Tom Lee, managing partner and co-founder of New York-based Fundstrat Global Advisors LLC, said by phone. “The Fed came in and said the central banks are prepared to protect markets if they need to, which helped shift attention back to fundamentals and it is consistent with being in a bull market.”

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