U.S. Stocks Rise Amid First Fed Interest-Rate Boost Since 2006

  • Policy makers vote unanimously to raise rates 25 basis points
  • Energy shares lag after two-day rally as crude oil tumbles

Fed Raises Interest Rates, First Time in Nearly a Decade

U.S. stocks rallied as the Federal Reserve ended seven years of near-zero interest rates, and assured investors that the world’s largest economy is resilient enough to withstand future increases in borrowing costs at a gradual pace.

Equities extended gains following the central bank’s move, pushing the Standard & Poor’s 500 Index to its biggest three-day rally since Oct. 5 as the benchmark rebounded from its worst weekly drop since August. Gains were widespread with nine of the gauge’s 10 main industries rising more than 1 percent after Fed Chair Janet Yellen expressed confidence in the economic outlook.

The S&P 500 jumped 1.5 percent to 2,073.07 at 4 p.m. in New York, rising for three consecutive days for the first time since October and erasing losses for the year. The benchmark surged above its average prices during the past 50 and 200 days. The Dow Jones Industrial Average added 224.18 points, or 1.3 percent, to 17,749.09. The Nasdaq Composite Index gained 1.5 percent. About 8.6 billion shares traded hands on U.S. exchanges, 18 percent above the three-month average.

“This is a very dovish rate increase,” said Stephen Wood, who helps manage $237 billion as chief market strategist for North America at Russell Investments in New York. “It came right in in line with expectations and markets appear to like that. It’s the Fed giving its seal of approval on the economy and financial conditions, but also the Fed didn’t surprise with a more aggressive future path.”

The Fed raised rates in a widely telegraphed move while signaling that the pace of subsequent increases will be “gradual” and in line with previous projections. The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.

Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

“The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,” the FOMC said in a statement. The Fed said it raised rates “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes.”

Era Ends

The action ends an era of unprecedented monetary stimulus that pushed stocks higher by more than 200 percent and added $15 trillion in value during the 6 1/2 year bull market. Investors will now find out how much stocks are worth in the absence of Fed support, and how high borrowing costs will be without the central bank stoking growth as aggressively.

For equities, history suggests two immediate consequences from tightening: higher volatility and lower valuations, meaning earnings and ultimately the economy are left to drive prices.

Investors have spent the second half of 2015 coping with the first correction in four years and an increase in volatility that by some measures was a record. From plunging oil to emerging-market turmoils and the selloff in junk bonds, anticipation of the Fed’s retreat added to anxiety that’s already pushed a measure of volatility above levels at the start of past Fed liftoffs.

“This was probably the most expected rate change in the history of the Fed,” said Larry Peruzzi, managing director of international equities at Mischler Financial Group Inc. in Boston. “Markets had pretty fairly readjusted their pricing on the equity and fixed-income side going into this, and the optimism now is in the wording warranting gradual interest rate increases as opposed to measured ones.”

While policy makers have deemed the economy ready for higher borrowing costs, they continue to stress that progress in data will dictate the ultimate pace of rate increases. A report today showed new-home construction rebounded in November, led by gains in single-family dwellings. Work began on the most stand-alone houses since January 2008, and permits for similar projects reached an eight-year high.

A separate gauge showed manufacturing stagnated last month, held back by less production of durable goods such as automobiles and metals that reflects weak global demand.

VIX Slides

The Chicago Board Options Exchange Volatility Index fell 15 percent Wednesday to 17.86, extending its decline this week to 27 percent, on track for the steepest drop since July. The measure of market turbulence known as the VIX surged 65 percent last week, the most since a record monthly jump in August.

Nine of the S&P 500’s 10 main industries rose, with utilities up 2.6 percent, the group’s biggest advance in nine months. Phone companies and consumer staples rose at least 1.9 percent. Energy shares fell along with crude oil.

CVS Health Corp. climbed 5.4 percent, the most in four years, to lead consumer staples. The biggest provider of prescription drugs in the U.S. raised the low end of its 2016 earnings forecast and increased its dividend. Walgreens Boots Alliance Inc. added 3.2 percent.

Honeywell International Inc. jumped 5.7 percent, its strongest gain in more than three years. The maker of jet engines and gas detectors forecast sales and earnings above analysts’ expectations, defying an industrial slump as it cuts costs and markets new products. General Electric Co. rallied 2.2 percent to a seven-year high after projecting the return of about $26 billion in cash to investors through dividends and stock repurchases in 2016.

Sustainable energy power generator NextEra Energy Inc. jumped 5 percent, the most in six years, to help boost the utilities group. U.S. lawmakers agreed to extend a key federal tax credit and also provided a five-year retroactive extension for the production tax credit, which benefits wind-power developers and expired at the end of 2014.

First Solar Inc. added 9.7 percent and SolarCity Corp. soared 34 percent, the most in two years, following the extension on the tax credits, and as California regulators upheld policies that promote the use of rooftop solar panels.

West Texas Intermediate crude-oil futures lost 4.9 percent, dragging energy producers down for the first time in three days. Pioneer Natural Resources Co. fell 7 percent, while Marathon Oil Corp. and Devon Energy Corp. dropped at least 4 percent. A report today showed U.S. crude inventories climbed to the highest level for this time of year since 1930.

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