U.S. Stocks Rally as Senate Nears Deal on Debt Ceiling

16 Oct

U.S. stocks rallied, sending the Standard & Poor’s 500 Index (SPX) toward a record, as the Senate crafted a deal to end the government shutdown and raise the debt ceiling before tomorrow’s deadline.

The S&P 500 rose 1.4 percent to 1,721.47 at 4 p.m. in New York. The benchmark gauge slid 0.7 percent yesterday after climbing 3.3 percent over the previous four days.

“Investors are relieved that it looks like we’re not going to go over the cliff,” Ben Hart, a research analyst at Radnor, Pennsylvania-based Haverford Trust Co., which oversees about $6 billion, said by phone. “It takes the worst case scenario off the table.”

The S&P 500 dropped 4.1 percent from its all-time high of 1,725.52 reached Sept. 18 as Congress struggled to reach agreement on a federal budget, forcing the first partial government shutdown in 17 years. The gauge has recovered 4 percent of the decline as optimism grew that a deal would be reached, and is within about four points of its record. The S&P 500 is up 21 percent for the year.

The bipartisan leaders of the Senate reached an agreement to end the fiscal impasse and to increase U.S. borrowing authority. The Senate and House plan to vote on it later today, and the White House press secretary said President Barack Obama supports the deal.

The framework negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations.

Four-Week Standoff

The agreement concludes a four-week standoff that began with Republicans demanding defunding of Obama’s 2010 health-care law, and objecting to raising the debt limit and funding the government without policy concessions. House Speaker John Boehner said in a statement that Republicans won’t block the Senate compromise.

With no deal, the U.S. would exhaust its borrowing authority tomorrow and the government may start missing payments at some point between Oct. 22 and Oct. 31, according to theCongressional Budget Office. Fitch Ratings put the world’s biggest economy on watch for a possible credit downgrade yesterday, citing lawmakers’ inability to agree.

The S&P 500’s advance over the past week has squeezed managers who borrowed and sold shares to bet on declines lawmakers would struggle to reach a deal. U.S. companies with the most short sales have climbed 4.7 percent since Oct. 9, compared with a 3.9 percent advance for the benchmark gauge, data compiled by Bloomberg and Goldman Sachs Group Inc. show.

Hedge funds, whose bearish bets on stocks have held their returns to half the Standard & Poor’s 500 Index in 2013, helped send a gauge of manager bullishness compiled by ISI Group LLC within 0.2 point of its lowest reading in 2013 last week.

Fed Stimulus

Equities have surged in 2013 as the Federal Reserve maintained efforts to stimulate the economy by holding interest rates near zero percent and purchasing $85 billion of bonds each month under a program known as quantitative easing.

The rally in 2013 has been the broadest in at least 23 years, with S&P 500 companies extending the streak of quarters in which they have avoided an earnings contraction to 15 and valuations holding below historic averages. Of S&P 500 members, 443 are up so far in 2013, data compiled by Bloomberg show. The next-closest year was 1997, when 436 companies had advanced and the index was quadrupling.

Profits for companies in the index probably increased 1.4 percent during the third quarter while sales rose 2 percent, according to analysts’ estimates compiled by Bloomberg. Some 22 companies in the S&P 500 are due to post results today.

U.S. economic growth remained “modest to moderate” as consumer spending maintained gains and business investment grew, the Fed said today in its latest Beige Book business survey. Four of the 12 Fed districts reported slower economic growth while eight others said the expansion held steady amid “uncertainty” stemming from the U.S. fiscal deadlock.

The report provides policy makers anecdotal accounts from the Fed districts two weeks before they meet to set monetary policy.

(Source : Bloomberg)

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