U.S. Stocks Advance on Optimism Over Economy Before Fed

May 21, 2014

Chicago (May 21)  U.S. stocks advanced, after equities fell yesterday for the first time in three days, as small-cap stocks rebounded amid speculation the economy is strong enough to weather further stimulus cuts by the Federal Reserve.

Tiffany & Co. gained 9.2 percent after quarterly profit beat estimates. Netflix Inc. rose 1.4 percent after saying it will expand its online-video service in Europe. Intuit Inc. dropped 3.4 percent after cutting its forecasts for the current quarter.

The Standard & Poor’s 500 Index (SPX) added 0.6 percent to 1,883.11 at 9:50 a.m. in New York. The equity benchmark is 0.8 percent away from a record reached on May 13. The Dow Jones Industrial Average climbed 104.12 points, or 0.6 percent, to 16,478.43. The Russell 2000 Index of smaller companies increased 0.7 percent. Trading in S&P 500 companies was 20 percent below the 30-day average for this time of day.

“We know that tapering will continue, so the most the Fed can do is reassure the market that the U.S. economy is on a good track,” Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG, said by phone from Bonn. “Companies that close their quarter later than March show an improvement from the beginning of the year, which suggests that activity was only weak because of the winter weather. Maybe investors are a little more cautious now with markets trading near records, but the mood is still positive.”

The Fed releases minutes from its April 29-30 meeting at 2 p.m. in Washington. Policy makers said last month the economy is showing signs of picking up and the job market is improving. The central bank 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 Stimulus

Fed Chair Janet Yellen said last week the U.S. economy has further to go to achieve full health and predicted small businesses will play a vital role in the recovery.

Three rounds of bond purchases by the Fed have helped send the S&P 500 up as much as 180 percent from a 12-year low in 2009. It is trading at 15.9 times the projected earnings of its members, greater than a five-year average of 14.3 times, according to data compiled by Bloomberg.

The S&P 500 fell 0.7 percent yesterday after retailers reported lower-than-estimated earnings and small-cap shares slumped. The benchmark index closed at an all-time high of 1,897.45 on May 13 before a selloff in small-cap stocks spread to the broader market. The Russell 2000 tumbled 1.5 percent yesterday, and is down 8.5 percent from a record set in March.

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