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

More than $500 billion wiped off the value of U.S. stocks is providing opportunities for investors who remember that equities tend to rise when the Federal Reserve begins reducing efforts to stimulate the economy.

The Standard & Poor’s 500 Index, which has fallen 2.5% from its May 21 record, rallied an average 16% over two years the last four times the central bank started raising interest rates, according to data compiled by Bloomberg. While the 87% gain since December 2008 is the biggest following Fed reductions, the advance hasn’t pushed valuations above historical averages.

Bears say this time is different amid mounting pressure on the government to reduce spending and on the central bank to cut bond purchases that pump funds into the financial system even as the economy expands at the slowest rate following a recession since World War II. Bulls say a decision by the Fed to reduce stimulus would be proof the economy can expand on its own and that valuations are low enough to spur more share gains.

“The Fed tightening, that’s good for stocks,” John Canally, investment strategist at Boston-based LPL Financial Corp., which has $373 billion in advisory and brokerage assets, said in a June 12 phone interview. “You have to remember why they’re doing this, because they think the economy is in a self-sustaining phase, which ultimately is good for profits, which is good for stocks.”

Weekly Decline

Stocks fell for the third time in four weeks, with the S&P 500 losing 1% to 1,626.73, after Chinese industrial production rose less than forecast and investors awaited a meeting of the Federal Open Market Committee starting tomorrow. The retreat cut 2013’s gain to 14% and the increase since shares bottomed in March 2009 to 140%. The S&P 500 rose 0.9% to 1,641.02 at 9:40 a.m. New York time today.

Swings in prices have jumped since May 22, when Fed Chairman Ben S. Bernanke suggested the central bank could begin to reduce, or taper, its $85 billion in monthly mortgage bond and Treasuries purchases. The potential for a change in policy has increased the conflict between bulls and bears who say the stock market has been artificially inflated by the Fed.

The value of all American equities has contracted to $19.3 trillion from $19.8 trillion at the peak, according to data compiled by Bloomberg. Capitalization of shares on global markets is $55 trillion, down from $58 trillion four weeks ago.

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