U.S. Stocks Rally, S&P 500 Regains Seven-Month High After Yellen

  • Fed chair signals gradual rate increases still appropriate
  • Banks bounce after their worst drop in almost two months

What Will Get Markets Moving Again?

U.S. stocks advanced, with the S&P 500 Index regaining a seven-month high, as Federal Reserve Chair Janet Yellen signaled the economy is still strengthening enough to withstand gradual increases in borrowing costs despite recent signs of slower job growth.

Investors moved past the weakest monthly employment gains since 2010 to focus on the beneficiaries of a lower dollar and a bounce in Treasury yields. Banks rebounded from their worst drop in almost two months, while rising crude prices helped Halliburton Co. climb to its highest in nearly a year, and Transocean Ltd. jumped almost 15 percent.

The S&P 500 gained 0.5 percent to 2,109.41 at 4 p.m. in New York, 1 percent away from a record set a year ago after the gauge flirted with a 10-month high. The Dow Jones Industrial Average added 113.27 points, or 0.6 percent, to 17,920.33, while the Nasdaq Composite Index rose 0.5 percent. The Russell 2000 Index increased 1.1 percent to the highest in six months. About 6.4 billion shares traded hands on U.S. exchanges, 10 percent below the three-month average.

“The Fed wants to see at least one more employment situation report to see if the latest was an aberration or the beginning of a new trend,” said Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management LLC, which oversees $242 billion. “She seems very optimistic and I like that she’s outlining the risk to the outlook, but I don’t see any further clarity as to whether they’re going to hike in July or September.”

Yellen said in a speech in Philadelphia today that the May employment numbers were “disappointing,” while also pointing to one of the few encouraging elements of the report -- the increase in average hourly earnings. The Fed chair said positive forces supporting job growth and higher inflation will still probably outweigh negative developments, calling additional gradual rate increases appropriate without specifying their precise timing.

Banks were on the mend after dragging equities lower Friday, as Treasury yields recovered from the steepest tumble in 11 months which spurred speculation low rates would continue to weigh on lenders’ profitability. The group reached an almost five-month high Thursday before the weak jobs report dashed rising expectations that the Fed could lift rates as soon as this month.

Gains in financial shares helped the S&P 500 rebound 15 percent from a 22-month low in February low through last Thursday, when it surpassed the 2,100 level, before slipping 0.3 percent on Friday. The index has failed to keep its gains beyond 2,100 in prior rallies during the past year. Friday’s decline and today’s recovery continued the market’s sideways movement, with the benchmark closing up or down less than 0.5 percent for seven straight days, the longest stretch since November.

Rate Bets

Skepticism resurfaced after the employment data sparked concern over the vitality of U.S. growth as the Fed contemplates raising interest rates further. Traders cut bets for an increase in the next few months, now pricing in a 2 percent chance of a June boost, and about a 22 percent probability it will be in July -- down from 22 percent and 55 percent, respectively, before the jobs release. December is the first month with at least even odds of a rate.

Fed Chair Yellen’s appearance is the last by a central bank official scheduled before the next policy meeting concludes on June 15. Boston Fed President Eric Rosengren said in Helsinki today he expects economic conditions to continue improving, making further rate increases appropriate, although it will be important to see whether a weak employment report for May proves to be an anomaly.

Atlanta Fed’s Dennis Lockhart on Bloomberg TV added his voice to the argument for a delay, saying the central bank should wait until at least next month to consider raising rates because of a slowing labor market and the British vote on European Union membership.

“This is the most uninspiring economic cycle we’ve ever seen,” Jonathan Golub, the chief U.S. market strategist at RBC Capital Markets LLC, said in a Bloomberg TV interview. Still, he says he remains bullish on U.S. equities. “This was a weak number but just one weak number. The market’s general view is things are fine.”

Energy, Financials

In Monday’s trading, eight of the S&P 500’s 10 main industries rose, with energy producers surging 2 percent to a five-week high. Raw-materials, industrial and financial shares advanced at least 0.5 percent. Consumer shares, utilities and phone companies were little changed. A Goldman Sachs Group Inc. basket of the most shorted stocks in the Russell 3000 Index posted the biggest gain in two weeks.

Despite the equity rally, the CBOE Volatility Index rose 1.3 percent to 13.65. The measure of market turbulence known as the VIX on Friday posted its third weekly increase in the last four.

Transocean soared to its highest level since March as today’s strongest performer in the energy group and S&P 500. Devon Energy Corp. and Baker Hughes Inc. gained more than 4.5 percent. West Texas Intermediate crude futures rallied 2.2 percent to settle near $50 a barrel on signs a global glut is contracting more quickly than projected.

Among raw-material producers, CF Industries Holdings Inc. rallied 8.9 percent after CLSA Americas LLC upgraded the shares to buy. Freeport-McMoRan Inc. and Mosaic Co. added at least 4.8 percent. The Bloomberg Commodity Index climbed to the highest since October.

JPMorgan Chase & Co. and Wells Fargo & Co. rose at least 0.6 percent to give the biggest lift to a group of banks in the benchmark index. Zions Bancorporation rebounded 2.8 percent to erase Friday’s 1.2 percent slide. In the broader financials group, Legg Mason Inc. and State Street Corp. increased at least 2.5 percent.

Retailers fell for a second day, limiting a rise in consumer discretionary shares. Best Buy Co. dropped 3.2 percent after Chief Executive Officer Hubert Joly sold $12.8 million in stock, cutting his stake in the electronics retailer by 44 percent. Home Depot Inc. and Lowe’s Cos. lost more than 1.9 percent.

Apartment real-estate investment trusts were the worst performers Monday, with Apartment Investment & Management Co. losing 2.6 percent to fall for a fifth day, the longest since August. UDR Inc. and Equity Residential fell more than 2 percent.

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