S&P 500 Rises for Week to Record Amid Optimism on Economy

May 25, 2014

New York (May 25)   The Standard & Poor’s 500 Index (SPX) rose for the week to a record and small-cap shares rebounded amid better-than-estimated data that boosted confidence in the strength of the world’s largest economy.

Tiffany & Co. and Best Buy Co. advanced at least 6 percent to pace gains among retailers as profits topped forecasts. An index of homebuilders climbed 3.9 percent as reports showed U.S. home sales rose in April. The Dow Jones Internet Composite Index rallied for a second week, with TripAdvisor Inc. and Netflix Inc. posting the biggest increases in the S&P 500.

The S&P 500 climbed 1.2 percent in the period to close at a record 1,900.53. The Dow Jones Industrial Average added 114.96 points, or 0.7 percent, to 16,606.27, about 0.7 percent below its closing high. The Russell 2000 Index of small companies ended a two-week slide, increasing 2.1 percent.

“You have a constructive environment here,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. His firm oversees $1.9 billion. “Corporate profits are growing, interest rates are low, valuations are fair and you can earn a fair return in stocks compared to your other options.”

A gauge of U.S. stock volatility known as the VIX dropped 8.7 percent during the five days to 11.36, the lowest level since March 2013. The Chicago Board Options Exchange Volatility Index (VIX) has retreated 47 percent from a 14-month high in February.

Economic Data

U.S. economic reports during the week beat forecasts as the Citigroup Inc. U.S. Economic Surprise Index, which rises when releases exceed forecasts, climbed to 1.4 over the period, rising above zero for the first time since February.

A preliminary index of U.S. manufacturing expanded in May at the highest rate in three months. Sales of new and previously owned U.S. homes rose in April for the first time in at least three months. An index of leading indicators grew 0.4 percent, indicating the economy will strengthen in the next three to six months after a first-quarter slowdown.

Investors “came into 2014 with overly optimistic expectations, but those are being reset,” Chris Gaffney, senior market strategist at EverBank Wealth Management in St. Louis, said in a phone interview. “Overall, investors are expecting a continued recovery right now with continued gains in equities.”

Fed Stimulus

Central bank officials have been gauging the strength of the economy to help determine the pace of cuts to stimulus efforts that have sent the S&P 500 up 181 percent from a 12-year low in 2009. The Federal Reserve pared its monthly asset buying to $45 billion in April, its fourth straight $10 billion cut, and said further reductions in measured steps are likely.

Fed policy makers said during the week that continued stimulus doesn’t risk fueling a jump in the inflation rate. Central bank policy makers said last month the economy is showing signs of picking up and the job market is improving.

The S&P 500 is trading at 16.1 times projected earnings. That’s below levels from the market’s two previous peaks, when the ratio reached 16.7 in October 2007 and 26.3 in March 2000, according to data compiled by Bloomberg.

Of the 489 S&P 500-listed companies that have released results this season, 75 percent have beaten estimates for profit, while 53 percent have exceeded projections for revenue.

Seven out of 10 main S&P 500 industries rose for the week. Technology and consumer-discretionary shares rallied the most, with gains of more than 2 percent.

Retailers climbed 1.8 percent as a group. Tiffany surged 6.8 percent to $96.59 and Best Buy increased 6 percent to $27.01. Both companies exceeded earnings expectations by more than 25 percent.

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