U.S. Stocks Rally as Housing Data Bolster Optimism on Economy

  • Builders jump after April sales surge, Toll Brothers earnings
  • Tech shares soar, Banks gain amid rising bets on higher rates

What Drove Today's Rally in the U.S. Stock Market?

U.S. stocks rose the most in more than two months, as a surge in home sales fueled speculation the economy can withstand higher interest rates amid rising bets the Federal Reserve will tighten policy this summer.

A gauge of homebuilders jumped the most since January 2014 amid the data, with Toll Brothers Inc. seeing its biggest climb in three years as its quarterly profit also topped estimates. Technology companies soared to their strongest gain in 12 weeks, as Microsoft Corp. and Google parent Alphabet Inc. rose at least 2.2 percent. Banks climbed on expectations for higher rates, with Treasury yields at a three-week high. JPMorgan Chase & Co. and Citigroup Inc. added at least 1.6 percent.

The S&P 500 gained 1.4 percent to 2,076.06 at 4 p.m. in New York, the steepest climb since March 11, pushing the index to a two-week high. The Dow Jones Industrial Average added 213.12 points, or 1.2 percent, to 17,706.05. The Nasdaq Composite Index increased 2 percent, the most in almost three months. About 7 billion shares traded hands on U.S. exchanges, 4 percent below the three-month average.

“Maybe investors are realizing that a hike of 25 basis points is not the end of the world,” said Thomas Garcia, head of equity trading at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “Those were nice housing numbers. It seems as though the market is excited that we are still going strong and the Fed can raise rates.”

A report today showed April new-home sales surged to the highest level in more than eight years, pointing to a robust spring selling season for builders. The median sales price climbed to a record, reflecting a pickup in signed contracts for more expensive properties.

Traders are now pricing in a better-than-even chance of a rate increase by July, as Fed officials signaled their willingness to make such a move if the economy shows sustained progress. Odds for a June boost rose to 36 percent from 4 percent last Monday. Along with today’s April new-home sales report, investors will further scrutinize releases on consumer sentiment and GDP later this week for signs of further strengthening.

Tuesday’s rally suggested equities will snap out of a torpor that’s left markets struggling for direction as investors sought clarity on the Fed’s monetary path. The S&P 500 has alternated between daily gains and losses for seven sessions, and hasn’t had a back-to-back climb in two weeks. It traded Monday in the narrowest range since April 15 amid volume on U.S. exchanges that was the lowest in almost two months.

“People may be coming around on the idea of a rate hike as an indication of economic strength,” said Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates Inc. in Bethlehem, Pennsylvania. “Before there was a sense that higher rates would spell trouble, but the market has had time to digest that.”

After a rebound of as much as 15 percent from a 22-month low in February, the main U.S. equity benchmark has churned in a range of less than 50 points in May. The rally ran out of steam in late April, after the S&P 500 came within 1.4 percent of a record set just over a year ago, amid mixed earnings reports and lukewarm signs of economic growth.

Fed Speak

Fed meeting minutes last week, as well as more hawkish commentary from policy makers and improving data stoked concern the Fed may move sooner than markets were prepared. Fed Bank of Philadelphia President Patrick Harker late yesterday said two to three rate increases in 2016 were possible, while San Francisco Fed President John Williams said earlier a similar pace sounded “about right.” Fed Chair Janet Yellen is scheduled to speak on Friday.

In Tuesday’s trading, all of the S&P 500’s 10 main industries rose, with technology, financial, health-care and consumer discretionary companies rallying at least 1.4 percent. The CBOE Volatility Index fell 8.9 percent to 14.42, the most in nearly two months. The measure of market turbulence known as the VIX erased a gain for the month after reaching a two-month high last week.

“The first weeks of the year were the end of the world, and the story the next eight weeks was that there’s great promise on this Earth,” John Stoltzfus, chief market strategist at Oppenheimer & Co. in New York, said by phone. “Now, if the Fed is raising rates because the economy is doing better, that looks like a good thing and it seems the market is recognizing that. The jump today in new-home sales, it’s a volatile figure, but that’s a big deal.”

Tech companies led the benchmark gauge with a 2.1 percent jump, the biggest since March 1. Xilinx Corp. added 5.7 percent and Western Digital Corp. climbed 4.5 percent as the best performers. The group is still down 3 percent since touching a 2016 high on April 1, amid corporate earnings from giants including Microsoft and Apple Inc. that missed expectations. Apple rose for a third day to a four-week high, and Intel Corp. gained 2.8 percent, its strongest advance since January.

Financials, Builders

Financial companies have rallied more than twice as much as the S&P 500 since the Fed minutes last week, extending gains to 3 percent since May 17 with a 1.5 percent rally on Tuesday. Moody’s Corp. and Affiliated Managers Group Inc. each added at least 3.5 percent as all but two stocks in the 91-member index advanced. The KBW Bank Index climbed 1.6 percent.

A group of insurance companies in the S&P 500 rose to a five-month high on speculation higher interest rates will help lift profits. Principal Financial Group Inc. gained 2.3 percent, while MetLife Inc. and Prudential Financial Inc. increased more than 1.8 percent.

An S&P index of homebuilders hit a three-week high following the jump in new-home sales and Toll Brothers’ results. KB Home soared 7.5 percent, while PulteGroup Inc. and Lennar Corp. gained more than 3.8 percent. Builders were the strongest performers among consumer discretionary stocks, though other housing-related companies joined the rally. Whirlpool Corp. advanced 4.4 percent, its best this year, while flooring maker Mohawk Industries Inc. added 2.3 percent.

The health-care group capped the biggest climb since April 6, lifted by a parade of biotechnology companies. Vertex Pharmaceuticals Inc. and Gilead Sciences Inc. increased more than 3.4 percent. The Nasdaq Biotech index advanced 2.3 percent, rising for a third day in its longest winning streak in a month.

Among other companies moving on corporate news, Best Buy Co. tumbled 7.4 percent, the worst drop in four months, after forecasting second-quarter profit that trailed analysts’ estimates and announcing the departure of Sharon McCollam, who helped revamp the company’s operations and cut costs.

Norfolk Southern Corp. lost 2.9 percent, its biggest slide since March 8, after the railroad predicted coal volume will be lower than an earlier forecast.

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