S&P 500 surges to record on Fed bets after debt deal

Focus turns to third quarter earnings; a mixed bag, so far.

U.S. stocks rose Thursday, sending the Standard & Poor’s 500 Index to a record, as speculation grew that the Federal Reserve will maintain the pace of stimulus after Congress ended the budget standoff.
American Express Co. rallied the most in nearly two years after reporting third-quarter profit that beat analysts’ estimates. Newmont Mining Corp., the second-largest gold miner, jumped 4.6% as the price of the precious metal surged. International Business Machines Corp. sank 6.4% after posting its sixth consecutive drop in quarterly sales. Goldman Sachs Group Inc. dropped 2.4% as the bank reported a 20% drop in revenue.
The S&P 500 rose 0.7% to 1,733.15 at 4 p.m. in New York, surpassing the previous record of 1,725.52 from Sept. 18. The Dow Jones Industrial Average fell 2.18 points to 15,371.65, held down by IBM and Goldman Sachs. About 6.6 billion shares changed hands on U.S. exchanges, 12% above the three-month average.
“The taper seems a little bit further out, certainly than anybody expected eight weeks ago and maybe even just a couple of weeks ago,” Walter Todd, chief investment officer at Greenwood Capital Inc., said in a phone interview from Greenwood, S.C. He helps manage $950 million. “It keeps a lid on rates and provides more liquidity for risk assets like stocks. People are back to focusing on the individual company dynamics that occur during earnings season.”
The S&P 500 gained 2.4% during the 16-day government closure that ended Wednesday after President Barack Obama signed a bill to fund the government through Jan. 15 and extend the borrowing authority through Feb. 7.
Shutdown effects
Investors will now weigh the shutdown’s effects on corporate earnings and economic growth as the impasse fueled bets that the Fed will delay reducing its $85 billion in monthly bond purchases.
Pacific Investment Management Co. said the central bank will postpone tapering. The Fed “may now have no choice but to stay longer in its intense policy experimental mode –- due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction,” said Pimco Chief Executive Officer Mohamed El-Erian in a CNBC blog posting.
The “fiscal shenanigans” undermined the case for tapering, Dallas Fed President Richard Fisher, an opponent to increasing stimulus, said today. Kansas City Fed President Esther George, who has voted this year against expanding stimulus, said the Fed has enough data to assess the economy’s strength and should taper even amid fiscal “uncertainty.” The central bank next convenes Oct. 29-30.
Broad rally
The Fed stimulus has helped the equity gauge surge 156% from its March 2009 low. The index has jumped 22% this year and climbed to its previous intraday record of 1,729.86 on Sept. 19, a day after the Fed unexpectedly delayed tapering at its last policy meeting.
The rally in stocks this year has pushed valuations to a three-year high and is the broadest since at least 1990. The S&P 500 trades at 16.5 times reported operating profit, a 17% increase from the beginning of 2013, according to data compiled by Bloomberg. Some 445 stocks in the gauge have posted year-to-date gains through yesterday, data show. The second-broadest advance in the period was in 1995, when 434 stocks in the benchmark gained through Oct. 16.
Equities could come under pressure as companies from Knoll Inc. to NCI Inc. have said they expect the shutdown to affect revenue in the last three months of the year.
Revenue slowdown
“We are going to see a lower equity market and a longer period of lower rates” if corporate earnings start to deteriorate in the fourth quarter, BlackRock Inc. Chief Executive Officer Laurence D. Fink, who as head of the world’s biggest money manager oversees $4.1 trillion in assets, said today on “Market Makers” with Erik Schatzker and Stephanie Ruhle.
Knoll, an officer furniture maker, estimates about $10 million of government business to be pushed into next year, CEO Andrew Cogan said. Stanley Black & Decker Inc.’s shares yesterday dropped 14%, the most since 1992, after the toolmaker reduced its full-year profit forecast in part because of the shutdown. Campbell Soup Co. has seen consumers pull back after a year that included higher payroll taxes, along with the impasse in Washington, CEO Denise Morrison said.
Growth impact
Profits for S&P 500 companies probably grew 8.8% in the fourth quarter, according to analysts’ estimates compiled by Bloomberg as of Oct. 11.
S&P Ratings Services Wednesday said the shutdown has shaved at least 0.6% off of fourth-quarter 2013 gross domestic product growth, or taken $24 billion out of the economy. IHS Inc. of Lexington, Massachusetts, reduced its GDP growth estimate for the period to 1.6%, from 2.2% in September.
(Don’t miss: Advisers disgusted with D.C. politics after budget drama)
The U.S. economy will expand by 1.6% this year, according to economists surveyed by Bloomberg. That would be the slowest rate of annual growth since 2009.
Consumer pessimism
A report Thursday showed Americans in October were the most pessimistic about the nation’s economic prospects in almost two years as concern mounted that continued political gridlock will hurt the expansion. The monthly Bloomberg Consumer Comfort Index expectations gauge plunged to minus 31, the lowest level since November 2011.
“So far, we think earnings will be resilient, even to what happened in Washington,” Andres Garcia-Amaya, global market strategist at JPMorgan Chase & Co.’s mutual funds unit, said in a phone interview. His firm oversees $400 billion. “Short term, you might still have the sour taste of what happened the last couple of weeks. Fundamentally, the economy still has plenty of pent-up demand. The balance sheets of the consumer are actually in decent shape.”
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, sank 8.4%, after falling yesterday by the most in more than two years. The index has retreated 25% this year.

Third-quarter results
Profits for companies in the S&P 500 probably increased 1.4% during the third quarter as sales rose 2%, according to analysts’ estimates compiled by Bloomberg. Some 24 companies in the index reported results today.
Nine of 10 main groups in the S&P 500 advanced Thursday. Phone, utility and materials stocks rallied at least 1.3% to pace gains.
IBM plunged 6.4% to $174.83 for the biggest drop in the Dow. Third-quarter revenue fell 4% to $23.7 billion, $1 billion less than analysts had forecast in a Bloomberg survey.
Goldman Sachs fell 2.4% to $158.32. The world’s most profitable securities firm before the financial crisis said earnings were little changed as the bank cut costs in response to a 20% drop in revenue. The firm increased its dividend 10%.
IBM and Goldman are the second and third-biggest weightings, respectively, in the price-weighted Dow. Goldman was added to the gauge last month. The difference between today’s move in the Dow and S&P 500 was the biggest since April, according to data compiled by Bloomberg.

(Bloomberg News)

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