U.S. stock investors stopped worrying about higher interest rates, at least for this week.
The Standard & Poor’s 500 Index surged 3.3 percent to cap its best week of 2015 as Federal Reserve officials signaled the American economy is robust enough to withstand the first rate increase since 2006. Equities overcame investors’ anxieties following the attacks in France, and got further support as Europe’s central bank reiterated its intention to add stimulus if needed.
The specter of higher rates has whipsawed stocks this year, with shares generally retreating at any indication an increase was near. That dynamic changed this week, as equities surged even as policy makers repeated their desire to tighten, underscored by the minutes from their last meeting. The shift is a bullish signal, according to Tom Lee, head equity strategist at Fundstrat Advisors LLC.
“The most encouraging development this week is that equity markets rallied despite growing visibility of a Fed move in December,” Lee wrote in a research report to clients on Friday. “This is an inverse of the past few months, where stocks generally weakened as Fed odds rose. Equity markets are now prepared for a hike.”
The S&P 500 jumped to 2,089.17 in the five days, as the biggest gain since December pushed the gauge above its average price for the past 200 days and left it 2 percent below an all-time high.
Lee is the most bullish out of the 21 market strategists surveyed by Bloomberg. His year-end forecast of 2,325 is 8.9 percent higher than the average of estimates and calls for an 11 percent increase from Friday’s close.
The S&P 500’s rally recouped most of a 4.1 percent slide that started when Fed Chair Janet Yellen on Nov. 4 reminded investors that rates may rise in December. A government jobs report two days later delivered the strongest hiring data of the year, accelerating the selloff as the odds of a rate hike climbed.
That familiar trend of weakness in the face of tightening was broken as minutes from the Fed’s last meeting released Wednesday stressed that the pace of any interest-rate increases will be gradual, reassuring investors that higher borrowing costs won’t derail economic growth.
“It’s positive that the pace would be modest,” said Lawrence Creatura, who helps oversee about $350 billion as vice president and fund manager at Pittsburgh-based Federated Investors Inc. “At some level they’re thinking, can we get this over with so we can move on? Investors perceive that as a sign that the economy is strong enough.”
A measure of investor anxiety fell by the most since July, as the Chicago Board Options Exchange Volatility Index slid 23 percent. At the same time, turmoil on global financial markets that kept the Fed on the sidelines in September and October has eased. European shares ended the week at a three-month high, rallying as the region’s central bank president, Mario Draghi, reinforced the view that the institution will do what’s necessary to raise inflation.
While equities rallied, an area of the credit market flashed a sign of caution, as high yield bonds fell. Spreads over Treasuries rose to the highest level in nearly six weeks, while UBS Group AG warned of increased “contagion” fears from energy company woes after oil dipped below $40 a barrel for the first time since August.
“Equities tend to follow high yield over time,” said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York. “When junk bonds get hit hard it spills into equities because there’s not enough liquidity in junk to meet redemptions, and therefore people have to sell stocks to meet margin calls and it snowballs. It puts more pressure on the market.”
All 10 main groups in the S&P 500 climbed at least 1.3 percent, as consumer-discretionary shares led gains with a 4.5 percent rally. Nike Inc. jumped 8.9 percent after announcing a buyback plan, while Ross Stores Inc. and Gap Inc. advanced at least 6.9 percent after reporting results.
Deal activity added to gains, with Airgas Inc. surging 36 percent after agreeing to be bought by a French competitor. CSX Corp. jumped 11 percent as railroad operators rallied amid a bid for Norfolk Southern Corp. by Canadian Pacific Railway Ltd.
“The market is recovering everything it lost last week,” Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co., which oversees $8.5 billion in Bryn Mawr, Pennsylvania, said by phone. “Equities are still the most attractive option of various asset classes.”