S&P 500 Climbs Toward Record on Bets Fed Will Support Economy

Aug 20, 2014 5:08 pm ET

Aug. 20 (Bloomberg) -- U.S. stocks gained for a third day, sending the Standard & Poor’s 500 Index to within two points of a record, as minutes indicated the Federal Reserve will continue to support the economy amid uneven gains in the labor market.

The S&P 500 added 0.3 percent to 1,986.51 at 4 p.m. in New York. The gauge touched 1,988.57, briefly surpassing a closing high of 1,987.98 reached July 24, before pulling back. The Dow Jones Industrial Average rose 59.54 points, or 0.4 percent, to 16,979.13. The Russell 2000 Index of smaller companies slipped 0.4 percent. About 4.9 billion shares changed hands on U.S. exchanges, 14 percent below the three-month average.

“The Fed said if data points move toward their objectives faster than expected they’ll raise rates sooner than expected,” Todd Salamone, senior vice president of research at Cincinnati- based Schaeffer’s Investment Research, said via phone. “That’s still a big ‘if.’”

In minutes to the central banks’ July meeting, released today, Fed officials raised the possibility that an end to aggressive stimulus might occur sooner than anticipated while acknowledging continued slack in the labor market. The Fed is on pace to wind down its monthly bond purchases in October, and intends to keep the benchmark interest rate low for a “considerable time” after that.

The Fed minutes said that “many participants” noted that if jobs data moved toward the committee’s objectives more quickly than expected, “it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

Low Inflation

Chair Janet Yellen has committed monetary policy to stronger labor markets, which she measures with an array of indicators, so long as inflation remains in check. In their statement after the July 29-30 meeting, Fed officials downplayed recent declines in the unemployment rate, highlighting “significant underutilization of labor resources.”

Low inflation has given the Fed room to hold rates near zero even as economic growth shows signs of accelerating. Data yesterday showed inflation remains below the Fed’s target, while a report on Aug. 1 indicated employers added more than 200,000 jobs for a sixth straight month in July, the longest such period since 1997.

Yellen will speak on labor markets Aug. 22 at the annual Fed Bank of Kansas City’s economic symposium that begins tomorrow in Jackson Hole, Wyoming. Policy makers including European Central Bank President Mario Draghi will also speak.

S&P Rally

Three rounds of Fed stimulus and better-than-estimated corporate earnings have sent the S&P 500 higher by 194 percent from its bear-market low on March 2009.

The index has rebounded 4 percent from a three-month low on Aug. 7 as investors speculated central banks won’t raise rates sooner than anticipated. The S&P 500 has not had a decline of 10 percent in almost three years. It trades at 17.8 times the reported earnings of its companies, near the highest level since 2010.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P options prices known as the VIX, declined 3.5 percent to 11.78, the lowest level since July 23. The gauge has lost 14 percent this year.

Eight of 10 primary groups in the S&P advanced, with industrial stocks pacing gains with a 1 percent advance. Jacobs Engineering Group Inc. jumped 3.1 percent to $53.90. ADT Corp. increased 2.7 percent to $37.22 and Southwest Airlines Co. advanced 2.7 percent to $31.57.

International Rectifier Corp. soared 47 percent to $39.10. Infineon Technologies AG, Germany’s largest chipmaker, agreed to buy the company for about $3 billion in cash, adding to its power-management technology business.

Retail Earnings

Hewlett-Packard Co. and Target Corp. are among the six S&P 500 companies reporting earnings today. Stocks rallied yesterday as retailers including Home Depot Inc. and TJX Cos. led gains on better-than-projected results.

Staples Inc. declined 2.6 percent to $11.32 for the biggest loss in the S&P 500. The world’s largest office-supply chain will shut about 140 locations this year, part of a store-closing plan announced earlier, as the retailer responds to online competition.

J.M. Smucker Co. fell 1 percent to $102.42 after the maker of peanut butter and fruit spreads reported earnings that missed analysts’ estimates, citing slow sales of consumer foods and coffee.

Hertz Drops

“With multiples getting pushed up to full value, the market is starting to demand earnings-driven returns and top- line growth and they’re going to be a little more critical of earnings as a result,” Leo Kelly, the Hunt Valley, Maryland- based partner and chief executive officer of HighTower’s Kelly Wealth Management, said in a phone interview.

Hertz Global Holdings Inc. slumped 3.9 percent to $30.33 after saying its full-year results will miss the low end of its forecast. The company said its performance is being hurt by a record number of auto recalls, higher-than-expected operating expenses in the U.S. rental-car market and sluggish demand for its equipment business.

Investor Fir Tree Partners, which holds more than 3 percent of the stock, is urging Hertz’s board to replace Chief Executive Officer Mark Frissora, while billionaire Carl Icahn disclosed a stake and said he may seek representation on the board.

Software companies declined the most of 24 groups in the S&P. Adobe Systems Inc. lost 1.4 percent to $71.02 and Yahoo! Inc. slid 0.9 percent to $37.50.

--With assistance from Jonathan Morgan in Frankfurt and Elena Popina and Joseph Ciolli in New York.