Equities recover from downturn they didn't even know about

U.S. stocks rose on optimism the economy is recovering from a first-quarter contraction, while Treasuries advanced and the dollar fell. European shares tumbled as crises deepened in the Middle East and Ukraine.

The Standard & Poor’s 500 Index (CME:SPU14) rose 0.4 percent at 3:29 p.m. in New York, after a 0.6 percent drop yesterday. The 10- year Treasury yield decreased two basis points to 2.56 percent. The Stoxx Europe 600 Index slumped 1.1 percent, the most since April, and the rate on gilts slid nine basis points to 2.65 percent. The Bloomberg Dollar Spot Index dropped 0.2 percent. West Texas Intermediate crude (NYMEX:CLN14) climbed 0.4 percent as the U.S. opened the door to more oil exports.

The U.S. economy shrank 2.9 percent in the first quarter, more than forecast and the worst reading in five years, while separate data showed orders for U.S. business equipment climbed in May. The U.S. and Europe are prepared to level more sanctions against Russia in the absence of steps by President Vladimir Putin to de-escalate tensions in Ukraine. Sunni militants are consolidating their hold on a swath of Iraq and now threaten the integrity of the state, U.S. military and intelligence officials said.

“What the market is concluding is that first-quarter weakness was indeed weather-related and the second quarter is enjoying a bounce back from that,” Scott Clemons, New York- based chief investment strategist at Brown Brothers Harriman Private Banking, said in a phone interview. The firm oversees $28 billion. “If you average the two quarters together, what you’re seeing is an economy that continues to expand at a modest pace so the market has shrugged this off.”


Economic Data

The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled. The 2.9 percent decline followed a previously reported 1 percent drop, marking the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health-care spending.

Consumers returned to stores and car dealerships, companies placed more orders for equipment and manufacturing picked up as temperatures warmed, indicating the early-year setback was temporary. Combined with more job gains, such data underscore the view of Federal Reserve policy makers that the economy is improving.

Fed Chair Janet Yellen last week said accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth.


Durable Goods

Separate data today showed bookings for non-military capital goods excluding aircraft rose 0.7 percent after a 1.1 percent drop in April, indicating corporate investment is helping revive the economy. Demand for all durable goods decreased 1 percent, reflecting declines in the volatile transportation and defense categories.

Monsanto Co., the largest seed company, jumped 5.3 percent as it announced a $10 billion stock buyback plan. AbbVie Inc. climbed 2.5 percent after saying its $46.5 billion bid for Shire Plc offers “compelling” value for Shire shareholders and that it won’t rule out going hostile in its drive to acquire the drugmaker. CBS Corp. jumped 7.2 percent after the U.S. Supreme Court ruled that Aereo Inc. is violating broadcaster rights.

“The market is partying on,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a phone interview. His firm manages about $247 billion globally. “Fed tightening is not on the horizon, corporate outlook is fine, and if you look at dividend yields, stocks are attractive from a valuation point of view.”


S&P Record

The S&P 500 reached a record last week and is up 7.9 percent since a low on April 11 as data showed the economy is recovering from extreme weather. The gauge is up 1.8 percent in June, for its fifth straight monthly increase, and 4.6 percent for the quarter.

Profits as a percentage of the S&P 500’s price, known as earnings yield, total 5.6 percent, exceeding the 2.5 percent yield on the 10-year Treasury note, according to data compiled by Bloomberg. The U.S. equity benchmark pays 1.9 percent in dividends.

U.S. stocks are poised for the third-slowest month in six years. About 5.6 billion shares have changed hands each day in June, trailing every month since 2008 except for the previous two Augusts, data compiled by Bloomberg show.

Trading is likely to get a boost on June 27, when Russell Investments concludes the annual revisions to its equity benchmark gauges. Russell’s U.S. stock indexes, including the Russell 1000 Index and the Russell 2000 Index, are used as benchmarks for $5.2 trillion in assets, according to the company’s website. In the previous two years, the reconstitution day ranked in the top two busiest trading sessions, data compiled by Bloomberg show.


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