Dow Climbs Toward 17,000 as Transports, Small Caps Hit Records

Jul 01, 2014 4:45 pm ET

July 1 (Bloomberg) -- Strength in manufacturing pushed the Dow Jones Industrial Average to within two points of 17,000 for the first time, joining small caps and transportation stocks at records in a pattern that chart analysts consider bullish.

Netflix Inc., Amazon.com Inc. and Biogen Idec Inc., among the biggest losers during a two-month selloff earlier this year, rose at least 2.3 percent. International Business Machines Corp. climbed 2.8 percent, leading a rally among technology stocks. General Motors Co. jumped 3.6 percent after a surprise sales gain in the auto industry’s best month since July 2006.

The Dow increased 129.47 points, or 0.8 percent, to 16,956.07 at 4 p.m. in New York. The Standard & Poor’s 500 Index climbed 0.7 percent to 1,973.32. The Russell 2000 Index of smaller companies rallied 1.1 percent and the Dow Jones Transportation Average gained 0.7 percent. The Dow, S&P 500 and transport gauge all closed at records, while the Russell 2000 touched an intraday high.

Simultaneous gains in disparate sections of the market are sometimes cited by chart analysts who base predictions on charts as evidence economic growth is pervasive enough to fuel additional gains.

“The breadth sends a message about the strength of the bull,” Rex Macey, chief allocation officer at Wilmington Trust in Atlanta, said in a phone interview. The firm oversees $82 billion. “People are comfortable with the story of the economic backdrop that we’ve got going on. People feel like they’re missing the boat and they want to get on.”

Stocks are extending a rebound from the selloff that started with biotech and small-cap stocks about five months ago. Equities have rallied since the S&P 500 reached a two-month low in April as central bank stimulus spread from Europe to Japan and the U.S. and economic data suggested global growth is strengthening.

The Russell 2000 has retraced nearly all of its losses after a 9.3 decline through May 15. The Nasdaq Biotechnology Index, which tumbled 21 percent from February to April, soared 2.3 percent today.

Biogen Idec climbed 3.1 percent to $325.05 and Amazon.com added 2.3 percent to $332.28. Both stocks sank 16 percent between March and April.

Manufacturing in China expanded in June by the fastest pace this year, a purchasing managers’ index compiled by the government showed today. The Institute for Supply Management’s U.S. factory index was little changed at 55.3 in June from 55.4 in the prior month, the Tempe, Arizona-based group’s report showed. Readings above 50 indicate expansion.

Manufacturing Strength

Producers of wood products, furniture, metals and machinery were among those seeing a pickup in demand as gains in auto and home sales rippled through the world’s largest economy. Growing consumer spending, lean inventories and improving overseas markets will probably keep assembly lines busy in the second half of the year.

“Manufacturing is back on track,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, the top U.S.-based ISM forecaster over the past two years, according to data compiled by Bloomberg.

U.S. auto sales adjusting for seasonal trends accelerated to an annualized pace of 16.98 million in June, the fastest in almost eight years, according to researcher Autodata Corp. Vehicle sales were aided by available credit and an improving economy with housing starts that remained near the 1 million mark in May.

GM rose 3.6 percent to $37.59, its highest level since March. The company reported a gain of 1 percent in auto sales, beating the average analyst estimate for a 6.3 percent decline.

Other reports this week may yield further clues on the strength of the U.S. economy. A private release may show U.S. employers hired more workers in June than in the previous month. The official jobs data is due Thursday, a day before the U.S. Independence Day holiday.

Economic Growth

U.S. equities have reached all-time highs, with the S&P 500 gaining 6.8 percent this year, as data from employment to housing fueled confidence that the U.S. economy is rebounding after the worst contraction in gross domestic product since 2009. Federal Reserve Chair Janet Yellen said on June 18 that accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth.

The S&P 500 trades at 16.7 times the projected earnings of its members, its highest valuation in four years. The U.S. market has gone more than two years without a 10 percent drop.

“With all these perceptions that GDP is going to improve in the second half of this year, Europe is getting their act together, why would I ever want to sell?” Jim Welsh, a portfolio manager at Forward Management LLC in San Francisco, said in a phone interview. His firm oversees $5.5 billion. “Markets don’t go down because they’re expensive or because there are too many bulls. They go down because there is a reason to sell, and there is no reason to sell.”

‘Great Environment’

Investors will get a further chance to assess the economy when companies start releasing financial results in July. Earnings for S&P 500 companies probably grew 5.2 percent during the second quarter while sales rose 3.2 percent, analyst estimates compiled by Bloomberg show. The forecasts are lower than they were at the beginning of April, when analysts projected earnings to rise 7.3 percent and sales to increase 3.7 percent.

“It’s a great environment,” Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co. in Bryn Mawr, Pennsylvania, said in a phone interview. The firm oversees $7.4 billion. “You have a slowly broadening recovery. You have the Fed that’s going to remain accommodative. We’re soon to embark on the earnings season and we’re optimistic about that.”

About 6.1 billion shares changed hands on U.S. exchanges today, in line with the three-month average. The Chicago Board Options Exchange Volatility Index declined 3.6 percent to 11.15. The gauge, known as the VIX, is near its lowest level since February 2007.

All 10 industry groups in the S&P 500 advanced except for utilities, with technology, health-care and consumer- discretionary stocks climbing at least 1 percent. IBM, a computer-services provider, gained 2.8 percent to $186.35 for the biggest increase in the Dow. The Morgan Stanley Cyclical Index added 0.7 percent, also closing at an all-time high.

Netflix, Twitter

Netflix gained 7.4 percent to $473.10. Goldman Sachs Group Inc. boosted its recommendation on the Los Gatos, California- based company to buy from neutral, citing the potential for global subscription growth. The shares have gained 29 percent for the year, recovering from a 31 percent plunge in March and April.

Twitter Inc. rose 2.6 percent to $42.05 after naming former Goldman Sachs banker Anthony Noto its new chief financial officer. Noto, who led the social-media company’s initial public offering last year, replaces Mike Gupta, who will assume the role of senior vice president of strategic investments.

GoPro Inc. jumped 20 percent to $48.80 amid optimism that revenue tied to users’ shared videos will fuel profit growth. GoPro’s first-person-viewpoint cameras, which let surfers, sky divers and bungee jumpers document their exploits, have attracted a younger generation driven by selfies and sharing adventures on social media. The shares have doubled since their market debut last week at $24.

--With assistance from Inyoung Hwang in London, Jacob Barach in New York and Lorraine Woellert in Washington.