Tags: stocks | Federal Reserve | interest rate | boost

Stocks Rise Amid First Fed Interest-Rate Boost Since 2006

Wednesday, 16 Dec 2015 04:13 PM

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’s 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.

The S&P 500 jumped 1.6 percent to 2,076.04 at 3:40 p.m. in New York, on the way to its third consecutive gain for the first time since October. The Dow Jones Industrial Average added 258.52 points, or 1.5 percent, to 17,783.43. The Nasdaq Composite Index gained 1.6 percent. Trading in S&P 500 companies was 18 percent above the 30-day average for this time of day.

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.

“Everything seems to be as expected and all the markets seem to be hanging in there,” Mark Kepner, an equity trader at Chatham, New Jersey-based Themis Trading LLC, said by phone. “Bond yields jumped and bounced back so we’re looking at an orderly bond market and stocks are now trending higher. The decision was unanimous, which was a big deal because you want to see a conviction here among everyone on the committee.”

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 following a two-day meeting in Washington. The Fed said it raised rates “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes.”

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 decided the economy is ready for higher borrowing costs, they have stressed that progress in economic data will dictate the ultimate course. 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 in last month, held back by less production of durable goods such as automobiles and metals that reflects weak global demand.

The Chicago Board Options Exchange Volatility Index, fell 17 percent Wednesday to 17.48, extending its decline this week to 28 percent, which would be 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 2.5 percent, while phone companies and consumer staples rose at least 1.9 percent. Energy fell along with crude oil.

CVS Health Corp. climbed 5.5 percent, the most in a year, 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 ahead of a meeting with investors on Wednesday. Walgreens Boots Alliance Inc. added 3.2 percent.

Honeywell 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 rallied 2.8 percent after projecting the return of about $26 billion in cash to investors through dividends and stock repurchases in 2016.

FedEx Corp. rose 3 percent, its best gain in two months, before its quarterly earnings report after the markets close.

Sustainable energy power generator NextEra Energy Inc. jumped 4.9 percent, the most in two 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.

West Texas Intermediate crude-oil futures lost more than 4.5 percent, dragging energy producers down for the first time in three days. Pioneer Natural Resources Co. fell 6.3 percent, while Marathon Oil Corp. and Devon Energy Corp. dropped at least 4.6 percent. A report earlier showed U.S. crude inventories climbed to the highest level for this time of year since 1930.


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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.
stocks, Federal Reserve, interest rate, boost
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2015-13-16
Wednesday, 16 Dec 2015 04:13 PM
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