Only Game in Town, U.S. Stocks Surge to Records in Yield Chase

(Bloomberg) -- U.S. stocks surged to an all-time high as global central banks signaled a rising willingness to stimulate growth, sending bond yields tumbling to multiyear lows.

The S&P 500 jumped 1% at 9:31 a.m. in New York, surpassing its all-time closing high of 2,945.83 set April 30. The Dow Jones Industrial Average rallied 245 points, withing striking distance of its first record since October. Stocks had plunged 6.6% in May as President Donald Trump pressed his trade war with China and the bond market rallied, signaling a potential slowdown in the economy.

The Federal Reserve’s dovish turn Wednesday sparked a late-day rally in risk assets, as investors consensus grew that the central bank is ready to cut as soon as July if economic data flags. Overnight, the Bank of Japan and Bank of England both indicated they stand ready to add to stimulus. The reaction in global bond markets was fierce, with German bund yields sliding deeper into negative territory and the rate on two-year and 10-year Treasuries touching multiyear lows.

“What’s the alternative with rates in the market this low?” said Donald Selkin, chief market strategist at Newbridge Securities Corp. “What’s the point of keeping up inflation? I’m surprised of the extent of this but that has to be the rationale. It’s not a perception of a better economy or better profits.”

The swiftness of the rebound in equities has been remarkable -- the S&P 500 took just 13 sessions to wipe out May’s pain, the fastest bounce back from a 5% sell-off in five years. Measures of relative strength signaled the index was oversold as recently as June 3. Those are now flashing warnings that the buying is about to go too far too quickly.

Defensive shares have paced the June rally, with real-estate and consumer-staple producers leading. Through Wednesday, the only other sectors higher since April are utilities and health-care. The groups pay relatively high dividends, making them attractive to investors seeking consistent payouts now that sovereign bond yields have plunged around the world.

“You can continue to see the markets overall melt higher due in part to unusual accommodations from the Federal Reserve,” said Chad Morganlander, a money manager at Washington Crossing Advisors. “It’s all been ebbing and flowing based on how quickly the Fed and ECB have done an about-face.”

It’s not all rosy for American stocks. Small caps in the Russell 2000 Index remain more than 10% from their all-time highs set last year, while the Dow Jones Transportation Average is more than 9% from its record. Both indexes are full of stocks considered more sensitive to economic cycles than their large-cap peers.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net

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