U.S. stocks ended higher on Monday, with the Dow industrials and the S&P 500 index closing a three-session losing streak as investors calibrated prospects for Federal Reserve rate increases in 2016.
The chance of a rate rise delivered a boost to bank shares, which tend to benefit the most in the face of higher interest rates. Trading activity remained subdued, with total composite volume the lowest of the year at just 4.94 billion shares.
The Dow Jones Industrial Average gained 107.59 points, or 0.6%, to close at 18,502.99, led by a rally in financial institutions. Shares of American Express Co. Travelers Cos. Inc. and J.P. Morgan Chase & Co. were among the best performers. Shares of Nike Inc., Walt Disney Co., and Apple Inc. were the only Dow components to end lower.
The S&P 500 index rose 11.34 points, or 0.5%, to settle at 2,180.38. All 10 of the large-cap benchmark’s sectors posted gains. Financials were the biggest winner, up 1%.
Meanwhile, the Nasdaq Composite Index added 13.41 points, or 0.3%, to close at 5,232.33.
Volatility has been remarkably subdued. The S&P 500 index’s 0.5% rise was the largest since Aug. 5.
Investors continued to weigh remarks by Federal Reserve Chairwoman Janet Yellen, who said Friday in Jackson Hole, Wyo., that an improving U.S. economy had strengthened the case for a rate increase. Those remarks were underscored by Fed Vice Chairman Stanley Fischer who said during a CNBC interview on the same day that Yellen’s speech was “consistent” with possibly two rate increases this year.
The Fed last December delivered its first rate increase in nearly a decade, but monetary policy remains very loose. Stocks have prospered amid ultraloose monetary policy that has fostered a multiyear bull market. Fear this accommodative environment may be coming to an end has weighed on the equity market amid talk of further rate increases.
At the same time, some analyst say Fed actions are being driven by economic growth that is steady, if not stellar.
“We have unemployment under 5%. There is no reason why the Fed should not move [to raise interest rates]. They are so close to their collective target[s] that having rates at this low doesn’t make any sense,” said Jonathan Golub, chief U.S. equity strategist at RBC Capital Markets. “And whether they do so in September or December is somewhat academic,” he said.
Golub said a rise in the yield of the 10-year U.S. Treasury note TMUBMUSD10Y, +1.75% to as high as 1.60% also implies that government-bond investors may be viewing the chance of a rate increase as a positive statement about U.S. economic health. “If they thought this were a negative, yields would be falling,” he said. Bond prices and yields move in the opposite direction; and government bonds tend to sell off in the face of higher rates, which make existing bonds less appealing.
“I think the market is warming to the idea of a rate hike,” said Ken Winans, president of Winans Investments. Some investors are saying ‘if my bonds are doing OK, maybe I can have more money go toward stocks, even if stocks seem frothy’,” he said.
Maris Ogg, president at Tower Bridge Advisors, said better-than-expected earnings and the outlook for better results in the second half of 2016 also are promising for stock investors.
“I think as you come through the second quarter…we will finally get through the earnings malaise,” she said. Ogg said stocks trading at a P/E of 17 does raise some questions about lofty valuations for S&P 500 traded equities. She says companies don’t need to show double-digit growth in quarterly results in coming quarters because gross domestic product, tracking 1.2% for the year, lowers the collective bar.
On the economic front, Americans increased spending by 0.3% in July, buying more new cars and trucks. Consumer spending has proved stable even as businesses investment has been weak.
Meanwhile, a closely watched measure of inflation increased, with the so-called PCE index, the Fed’s preferred gauge, showing consumer prices climbed closer to the central bank’s 2% target in July.
The focus is now on this Friday’s nonfarm-payroll data for August.
Elsewhere in the world, global stock-market indexes have struggled on the view rising rates in the U.S. may make the cost of borrowing more expensive, potentially slowing corporate expansion. Japanese stocks, however, bucked the downbeat trend as the yen USDJPY, +0.39% tumbled against the dollar. The yen moved triggered a 2.3% rally for the Nikkei 225 index The dollar ultimately pared its gains.
Comments from the Fed’s top dogs on Friday pushed the Dow industrials and the S&P 500 lower, though the Nasdaq finished higher.
Movers and shakers: Caesars Entertainment Corp. the parent company of the bankrupt Caesars Entertainment Operating Co., cannot shield itself from about $11 billion in claims from bondholders, a judge said Friday, according to Reuters. Shares tanked 16%.
Shares of Mylan NV ended the day up 0.4%, as the drugmaker said it would launch a cheaper, generic alternative to EpiPen after running into stark criticism for dramatically raising the price of the lifesaving drug.
Herbalife Ltd. shares rose 4.6% on Monday after reports indicated that the nutritional supplement company’s largest stakeholder, Carl Icahn, bought 2 million additional shares of the company on Friday.
Other markets: Gold futures settled marginally higher on Monday, picking up from last week’s losses, as the dollar gained. While prospects for higher rates can boost the dollar, they depress the value of precious metals that are priced in the currency.
Crude-oil futures slumped 1.4%, slipping under $47 a barrel.