Should rising interest rates worry investors?
Stocks shoot up at Tuesday's open, but bond yields move higher and trim gains substantially.
The major averages hit new intraday highs early in the day, thanks to good housing and consumer confidence numbers. The Dow Jones industrials ($INDU) jumped as many as 218 points, with the Standard & Poor's 500 Index ($INX) up nearly 25 points. The Nasdaq Composite Index's ($COMPX) had climbed as many nearly 56 points.
But starting around 10:25 a.m. ET, the averages started to fade and slowly but surely gave up roughly half their gains by the close.
The Dow closed up 106 points to a record 15,409. The S&P 500 added 10 points to 1,660. The Nasdaq was up 30 points to 3,489. The S&P 500's close, however, was its best close only since May 21 as well as its fourth-highest close ever, and the Nasdaq also had its best close in a week.
The Dow finished higher for a 20th straight Tuesday. The S&P 500 and Nasdaq have risen for 10 straight Tuesdays.The rally was triggered by other rallies, in Asia and Europe -- and then by a report showing home prices in March were up more than 10% from a year ago. Gains were largest in Phoenix, Las Vegas and San Francisco. But prices nationally were only back to 2003 levels, the S&P/Case-Shiller report said.
In addition, consumer confidence hit its highest level since February 2008, the Conference Board said.
All that said, the question is why were those big early gains were cut in half.
Obviously, interest rates were an issue. The 10-year Treasury yield hit 2.135% Tuesday afternoon, up from 2.011% on Friday and 1.63% on May 2. The 30-year Treasury yield climbed to 3.29% from Friday's 3.175%.
The Dow Jones Utility Average ($UTIL), which moves against to interest rates, fell 6.8 points to 492. The index is down 8.4% this month while the Dow Industrials, the S&P 500 and the Nasdaq are up 3.8%, 3.9% and 4.8%, respectively.
Investors have been fretting for weeks about when the Federal Reserve might start to taper down their big bond purchases, and the assumption is that rates will move higher when that happens. High rates will knock down bond prices.
There's a larger fear afoot, however, about when the Fed will actually raise rates. The consensus is not until 2014 at the earliest.
Still with everyone talking about interest rates, days with sizable gains followed by declines may occur fairly regularly, said Peter Tuz, president of Chase Investment Counsel of Charlottesville, Va.
There's also the worry that stocks look pricey. The major averages are up nearly 23% since Nov. 15, with almost no break, and all are trading 11% to 12% above their 200-day moving averages, which also suggests overconfidence.
Helping to give stocks support are the huge buybacks companies are announcing, but even this has a weakness. So far this year, big U.S. companies have given the go-ahead for $286 billion of buybacks, up 88% from a year ago, according to financial market research firm Birinyi Associates.
S&P 500 companies reported earnings of $98.30 in the first quarter of 2013, up $94.60 in the third quarter of 2011. JPMorgan Chase analysts believe that 60% of that gain -- $2.20 a share -- is due to buybacks taking hundreds of millions of shares off the market.
The risk going forward is that companies will spend too much buying in shares and the companies' growth won't be as fast.
For the record, 25 of the 30 Dow industrial stocks were higher on Tuesday, led by Microsoft (MSFT), UnitedHealth Group (UNH) and Walt Disney (DIS). The laggards included AT&T (T) and Verizon Communications (VZ), both communications stocks that are interest-rate sensitive. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
Meanwhile, 376 S&P 500 stocks were higher, along with 77 stocks in the Nasdaq-100 Index ($NDX). Dairy-producer Dean Foods (DF), TripAdvisor (TRIP), State Street (STT), E*Trade Financial (ETFC) and Tiffany (TIF) were the S&P 500 leaders.
Among Nasdaq-100 stocks, NetApp (NTAP)added 3.5% to $37.71. Apple (AAPL) fell $3.711 to $441.44. Facebook (FB) was down 21 cents to $24.10. The index was up 21 points to 3,012.
Costco Wholesale (COST), which reports quarterly results on Thursday, hit an all-time high of $115.77 before falling back to $114.83. Electric-auto maker Tesla Motors (TSLA) topped $100 for the first time, closing at $110.33, up $13.25. (Note: An earlier version of this post incorrectly said Costco would report results on Wednesday.)
Crude oil (-CL) finished up 86 cents to $95.01 a barrel. Brent crude was up $1.73 to $104.23. Gold (-GC) fell $7.70 to $1,378.90.
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A rally with no economic fundamentals and an idiotic government throwing gas on the fire has turned out well before... don't you think?
All the bubbles in the last 15 years have been far worse than they ever would have been because of bad government and Fed policies of artificially low interest rates, loose fed monetary policy, or both. Politicians set the system up for their crony capitalist buddies and the taxpayers end up paying. And, yes the crony capitalists suck, but can't we start by blaming the people rigging the game to start with... the guys on Capital Hill?
This time interest rates will raise our debt service costs to levels that will bring government deficits to unheard of levels. Sometime in the near future, the international business community will ALL (some have done it already) stop using U.S. dollars as a reserve currency and stop buying our debt out of fear that we can't pay up (which we can't). With every bubble, the government intrudes more and more and retards the free market, preventing it from growing or healing. One of my favorite sayings about government is "If you hate the problems we create... just wait til you see our solutions!".
All comments here say raising interest rates doesn't matter. What about the retired seniors who depend on
there savings interest to live. With interest near zero seniors have to use there savings and when that is
gone they will be on welfare and hurt the economy more.
Why keep your money in the bank for a measly chump change return
With normalized rates, the return to regular payroll taxes, and Seniors getting more bang for their buck with savings, an entire segment of the population might actually embrace rising rates. They are usually CASH Rich, and rates on the rise will mostly help that Segment. IMHO.
wall street bailout
auto makers bailout
cash for clunkers
the myriad of "green business" handouts
the 5 + years maintenance of the low interest for banks via currency devaluation
99 weeks of unemployment
Capitalism has been defined by adherents and detractors: Milton Friedman said, "The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system." John Maynard Keynes said, "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."
Perhaps it's best to turn to someone who actually practiced the art: "Capitalism is the legitimate racket of the ruling class." Al Capone said that.
Capitalism is a cult. It is devoted to the ideals of privatization over the common good, profit over social needs, and control by a small group of people who defy the public's will. The tenets of the cult lead to extremes rather than to compromise. Examples are not hard to find.
"Capitalism is the legitimate racket of the ruling class."
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