End of easing spurs S&P 500 gains of 16% as economy expands

Utility Yields

The S&P 500’s decline since reaching a record has been led by utilities, whose dividend yields lured fewer investors as Treasury 10-year rates climbed above 2%. Oneok Inc., the Tulsa, Oklahoma-based power provider, lost 10% and FirstEnergy Corp. in Akron, Ohio, slid 13% since May 21.

Equities usually gain when the Fed reverses course and starts to make money more expensive, signaling the economy is strong enough for policy makers to place inflation-fighting above growth concerns.

U.S. gross domestic product has expanded an average of 3.8% in years when the Fed began tightening, compared with an annual rate of 2.8% since 1971, according to data compiled by Bloomberg. Profits will jump more than 10% in each of the next two years after almost doubling since 2008, more than 11,000 analyst estimates show.

The S&P 500 gained 10% over two years starting in 1983 and 7.4% in 1987 after the Fed reverses policy. It jumped 35% between February 1994 and February 1996 and 11% two years after the Fed started raising rates in June 2004, according to data compiled by Bloomberg.

Stock Prices

Bears say history is no guide now because stock prices already rallied too much, given the state of the U.S. economy. The S&P 500’s 87% advance since the rate on overnight loans between banks was pushed to zero in December 2008 is more than five times the average advance in periods following monetary easing, data compiled by Bloomberg show.

Stock market volatility has been higher this year than during past periods when the Fed reversed policy. Daily moves for the S&P 500 have averaged 0.68% since March, compared with 0.48% for the first quarter, according to data compiled by Bloomberg. In the month before the Fed tightened in 1994 and 2004, daily price changes averaged 0.44%.

The S&P 500 plunged 1.4% on May 31 as better-than- forecast data on business activity and consumer confidence led to concern the Fed would pare its stimulus measures. The index gained 1.3%, the most in about seven weeks, on June 7 after the Labor Department said American employers added 175,000 jobs in May, exceeding economists’ forecasts.

‘What If’

“People are playing the what-if game on whether the Fed will taper,” Dan Veru, chief investment officer at Palisade Capital Management LLC, said in a June 12 phone interview. The Fort Lee, New Jersey-based firm manages $4.2 billion. “That’s why the market’s been so choppy. When investors don’t know what’s going on, they get out of all risk assets until they understand what’s happening.”

The employment report showed the automatic across-the-board federal spending cuts, or sequestration, that began in March are having an impact on government payrolls. Jobs created by the whole economy, including federal agencies, averaged 155,300 the last three months, compared with 170,500 from 2002 to 2007 and 1990 to 2000, data compiled by Bloomberg show.

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