U.S. stocks closed higher Monday, with the Dow Jones Industrial Average closing at its second-highest level ever, after strength in defensive stocks shook off early morning losses following a measure to cool China’s real-estate bubble.
The Dow Jones Industrial Average rose 38.16 points, or 0.3%, to its second-highest close of 14,127.82, about 37 points below its record close of 14,164.53 set in Oct. 9, 2007. The index was down as low as 14,030.37 earlier in the session.
Shares of Wal-Mart Stores Inc. led the index higher, rising 2.1%, followed by gains in Home Depot Inc. and Merck & Co. . Shares of Caterpillar Inc. led decliners on the Dow industrials, falling 1.8%, followed by United Technologies Corp. and Alcoa Inc.
The S&P 500 rose 7 points to close at 1,525.20, just 2.6% below its all-time close of 1565.15, hit on October 9, 2007. Utilities, a sector considered safer in times of economic turbulence, led the index higher, and consumer staples also gained. Industrials and energy were the hardest hit among the index’s 10 sectors. The index touched an intraday low of 1,512.28.
The Nasdaq Composite advanced 12.29 points to close at 3,182.03, even with index heavyweight Apple Inc. closing down 2.4% at $420.05, following a new 52-week low of $419.00 touched during the session.
The Nasdaq had fallen as low as 3,154.79 earlier in the session.
The earlier market headwinds hailed from China, where authorities late on Friday announced new property-buying restrictions, including higher down payments and mortgage rates on second homes in cities that have seen steep increases in property prices. Authorities also imposed a 20% capital gains tax on sales of existing homes.
“The good news is we recovered a bit” from earlier in the session, said Doug Sandler, chief equity officer at Riverfront Investment Group.
“The major source of weakness is China tightening,” he said, pointing out that the sectors most hit on Monday have a stake in China’s construction growth: industrials, machinery makers and energy.
China, the biggest consumer of many raw materials, is considered the most important factor in global growth for the past decade. See 60 Minutes video of China’s “ghost cities” resulting from the real estate boom.
China’s Shanghai Composite Index dropped 3.7%, its biggest percentage fall since August 2011.
But it’s better that China is addressing real-estate speculation now before it reaches a serious crisis level, said Scott Wren, senior equity strategist at Wells Fargo Advisers.
“China’s trying to curb speculation,” Wren said. “I still think China’s growth has bottomed out and will work its way higher this year and in 2014.”
For the most part, it’s a day where the market doesn’t have a lot of news to hang onto for direction: That’s more likely to come at the end of the week with the monthly jobs numbers, Wren said. All in all, stocks are in an uptrend, and investors are not convinced that sequester — or mandatory federal spending cuts — will do much harm now that the Federal Reserve has signaled its will have the markets’ back for an extended period of time, he said.
“Markets are pretty convinced we’re not going to see major entitlement reform or spending cuts,” Wren said.
U.S. and global equities have seen a strong rally since the start of the year, with the Dow Jones Industrial Average last week coming within 15 points of its all-time closing high.
But some investors fear the rally has become overstretched, leaving it vulnerable to at least a near-term pullback. China’s growth, or worries about its cooling, have been one of the factors intermittently giving pause to the 6% to 7% year-to-date gains in U.S. stocks.
Advancers outnumbered decliners by about 17 to 13 on the NYSE, and 13 to 11 on the Nasdaq. Composite volume topped 3.2 billion for NYSE-listed stocks, and 1.6 billion for Nasdaq-listed stocks.
Other tail risks include Europe, where a recent election in Italy raised the risk that the new government — once it’s in place — reverses austerity measures, and the U.S., where policy makers are at odds over budget cuts.
Economist Nouriel Roubini, who earned the nickname “Dr. Doom” after predicting the 2008 financial crisis, told Bloomberg in an interview that investors appeared to be underpricing the risk associated with the threat of a deeper euro-zone recession and the possibility that U.S. growth could slow in the second half due to tighter fiscal policy. See The Tell: Roubini says global rally masks threats from debt crisis, sequester.
Automatic spending cuts began to kick in on Friday as politicians proved unable to come up with an agreement to avoid them by coming up with a long-term deficit reduction plan.
Republican congressional leaders on Sunday said they would continue to insist that deficit reduction come exclusively through spending cuts, rejecting calls by Democrats and the White House for a mix of spending cuts and tax increases.
“I can’t get away from the sense that U.S. political protagonists quite like the idea of some fiscal tightening that they can blame on ‘the other guys,’” said Kit Juckes, head of foreign exchange at Société Générale. “But the sequester cuts 2013 GDP forecasts by between 0.2% and 0.5% and fuels the risk-averse mood as we await payrolls on Friday.”
Federal Reserve Vice Chair Janet Yellen on Monday said the central bank shouldn’t scale back its easy policy stance.
“At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment,” Yellen said in a speech to the National Association for Business Economics in Washington.
Her remarks come after Fed Chairman Ben Bernanke warned late Friday that a premature exit from the central bank’s aggressive monetary-policy easing campaign could backfire.
European stocks closed up fractionally, with the Stoxx Europe 600 index rising less than 0.1%.