Stocks rise over stimulus hopes

The stock market rose yesterday after two lacklustre economic reports convinced traders that the US central bank will continue to boost the economy with its stimulus programme.

Stocks rise over stimulus hopes

The stock market rose yesterday after two lacklustre economic reports convinced traders that the US central bank will continue to boost the economy with its stimulus programme.

Unemployment claims rose and an initial estimate of first-quarter economic growth was revised slightly lower.

That suggests the US economy may still need some time to recover from its funk and that the Fed will keep up its US $85bn in monthly bond purchases.

“The big worry that’s been hitting the market lately, that the Fed might step back prematurely, might be fading a little today on the idea that the economy does need a bit more support,” Jeff Kleintop, chief market strategist at LPL Financial, said.

The Dow closed up 21.73 points, or 0.1%, at 15,324.53 points. In other trading, the Nasdaq composite index rose 23.78 points, or 0.7%, to 3,491.30.

The S&P 500 rose in early trading, climbing as much as 13.6 points, or 0.8%, by late afternoon. The index then gave up some of the gains in the last hour of trading to end up just 6.05 points, or 0.4%, at 1,654.41.

The rise in the Standard & Poor’s 500 index was led by banking and insurance stocks, which gained 1.1%.

Banks and other stocks that stand to benefit the most from an improving economy have surged this week, a change from earlier in the year when investors favoured dividend-rich stocks like utilities.

Now investors are selling dividend-rich stocks and buying so-called growth stocks. The S&P’s financial index is up 2.1% this week, and its utilities index is down 2.5%.

Even after that increase, by one measure bank stocks are still less expensive than the broader market.

The price-to-earnings ratio for financial companies is still lower than that of S&P 500 average. The so-called P/E ratio is 14.4 for banks and insurers, compared with 16.2 for all companies in the S&P, according to FactSet.

In economic news, the number of Americans seeking unemployment aid rose last week, a sign layoffs have increased, the Labour Department said.

Claims for unemployment aid rose 10,000 last week to 354,000. The government also lowered its estimate for U.S. economic growth in the first three months of the year to 2.4% from 2.5%.

Trading has been choppy on Wall Street this week as investors wrestle with the question of whether the Fed will ease its economic stimulus.

Minutes released last week from the Fed’s last policy meeting showed that some central bank officials favoured slowing the purchases as early as next month, if the economy improves enough.

The programme has been a major factor supporting a rally in stocks by encouraging investors to buy riskier assets.

While the prospect of a change in Fed strategy is unsettling investors, ultimately, they should welcome the end of the stimulus because it means that the economy is strong enough to stand on its own two feet, JJ Kinahan, chief derivatives strategist at TD Ameritrade, said.

“It’s the vote of confidence,” he Kinahan said. “It should mean that the overall economy is healthy.”

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