By Michael Wursthorn
The Dow Jones Industrial Average closed at a new high Thursday
for the first time since late January, a sign of investors'
conviction in a booming U.S. economy.
The blue chips surged more than 250 points to cap a three-day
run of gains, the latest leg of a nine-year rally that hurtled the
index to its first record close since Jan. 26. The stock market's
rise has coincided with a pause in the U.S. dollar's rally and a
recent spike in government-bond yields, a signal investors are
viewing next week's expected increase in interest rates from the
Federal Reserve as a testament to the strength of the economy.
Investors are now grappling with the idea that stocks could move
beyond the range many Wall Street analysts had expected at the
start of the year. Thursday's rally pushed the Dow up 7.8% for the
year, while the S&P 500, which also set a new record, has
gained nearly 10% to 2930.78 -- putting it near the 2018 price
targets of banks such as Goldman Sachs and Bank of America Merrill
Lynch.
A strengthening U.S. economy is expected to keep the rally
going, analysts and money managers said, and has been a key factor
in helping investors look past the trade sparring between the U.S.,
China and others. Even with the unemployment rate at its lowest
level in nearly two decades and economic output growing at the
fastest rate since 2014, the economic outlook got rosier Thursday:
Initial jobless claims, a proxy for layoffs across the U.S., fell
to the lowest level since 1969, the Labor Department said.
"The good economic news has put us into a bit of a momentum
streak," said Larry Peruzzi, managing director of international
equity trading at Mischler. "And with bond yields going higher,
people are willing to take more risk and put more money into the
equity side."
The Dow industrials added 251.22 points, or 1%, to 26656.98. The
S&P 500 added 0.8% and the Nasdaq Composite 1%.
Analysts credit the boom in U.S. growth to the tax overhaul
passed last year. The changes, which included a cut to the
corporate tax rate, sent profits sharply higher through the first
two quarters of the year, and analysts expect third-quarter
earnings to be robust as well.
S&P 500 companies are projected to grow profits by 19% from
a year earlier in the third quarter, according to FactSet, after
posting growth rates of 25% for each of the first two quarters of
the year.
The expectation for strong profit growth is driving investors to
continue buying shares of technology companies, a sector that
includes some of the fastest-growing companies in the stock market,
some money managers said. That helped push tech companies in the
S&P 500 up 1.3% Thursday.
Shares of Apple added 0.8%, extending their gain for the year to
30%. Boeing and Caterpillar, which have both seen their stock
prices sag under concerns about trade tensions, added 0.6% and
2.1%, respectively.
The blue-chip index is the last of the big U.S. benchmarks to
eclipse its January record. Major indexes slumped into correction
territory in early February and have slowly churned higher to top
their previous highs.
While the strong economic growth has stoked stocks, bond prices
have stumbled, sending yields higher. The 10-year yield, which sits
at 3.076%, has climbed 0.222 percentage point in the past month and
is on track to rise for a fourth consecutive week. September's jump
in yields is the biggest since January.
The two-year Treasury yield, meanwhile, rose to 2.807%, the
highest since June 2008.
Investors increasingly expect quickening growth to give the
Federal Reserve sufficient reason to continue with its quarterly
pace of interest-rate increases through the first half of next
year. The market currently estimates a 94% chance of a rate rise at
the Fed's meeting next week, according to Fed-fund futures tracked
by CME Group.
Meanwhile, the U.S. dollar fell to its lowest level in more than
two months, another sign that investors expect the U.S. to avoid a
trade war. The WSJ Dollar Index, which measures the U.S. currency
against a basket of 16 others, dropped 0.4% to 88.87, its lowest
level since early August. The measure is off more than 2% from last
month's highs.
A weaker dollar eases pressure on multinational corporations
because it makes products cheaper to sell abroad, while boosting
the value of overseas earnings that are converted back to U.S.
dollars. It also could offer some relief to struggling
emerging-market countries that service their debt in U.S. dollars.
The WSJ Dollar Index is up nearly 3.5% this year.
Still, trade tensions continue to linger in the background and
have the potential to knock stocks off their highs if the U.S.,
China or other countries ratchet up their tactics, analysts said.
So far, investors are optimistic that trade tensions will
eventually cool, especially after the U.S. said it would stagger
its latest levies on Chinese imports.
Citigroup said in a report to clients that a worsening trade
environment represents "a material risk to growth into 2019." The
bank lowered its forecast for global growth this year to 3.3%, the
first downward revision since October 2017, with the same rate
expected next year.
"I would keep a close eye on the trade negotiations with Canada
and more importantly with China," said Chris Zaccarelli, chief
investment officer of Independent Advisor Alliance, a $3 billion
wealth-management firm. "I don't think we can blow the all-clear
sign until steps are in place to resolve trade concerns with China,
which are now more of a threat than ever."
--Daniel Kruger, Ira Iosebashvili and Georgi Kantchev
contributed to this article.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
September 20, 2018 16:35 ET (20:35 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.