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Dow and S&P 500 close at record highs

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(Bloomberg) --The Dow joined the S&P 500 to close at a fresh record, with U.S. equities climbing a third day as crude rallied and Alcoa’s results bolstered optimism on corporate health amid the start of the earnings season.

Alcoa jumped to a two-month high after the aluminum producer posted a profit that beat analysts’ estimates, kicking off the quarterly reporting period. BlackRock, JPMorgan Chase and Citigroup are among firms releasing results this week.

Commodity producers and and transportation stocks posted some of the biggest gains today, with American Airlines rallying 11% for its best day since at least December 2013. Oil and gas companies climbed to the highest since November as crude had its steepest gain in three months. Miner Freeport-McMoRan also increased 11%.

The S&P 500 added 0.7% to 2,152.14 at 4 p.m. in New York, extending its all-time high after surpassing yesterday the previous record reached in May 2015 on bets of a brighter economic outlook after Friday’s jobs report. The Dow rose 120.74 points, or 0.7%, to 18,347.67 today. The index briefly eclipsed the intraday record it set last year. The Nasdaq climbed 0.7% to the highest since Dec. 30.

“People are coming back into stocks because they see central banks coming in very quickly to backstop markets. That’s what we’ve witnessed post-Brexit,” David Zervos, chief market strategist at Jefferies, said in a television interview on Bloomberg Go.

Post-Brexit, many clients may want to sell, but others could see the volatility as a boon.
June 27

The S&P 500 climbed above 2,152, the average level at which strategists surveyed by Bloomberg see the equity benchmark ending 2016. It marks the first time since November 2014 that the gauge has caught up to their optimistic forecasts. About 7.6 billion shares traded hands on U.S. exchanges Tuesday, 5% above the three-month average.

Stocks have climbed since Friday, erasing the losses triggered by the U.K.’s vote to leave the European Union, as a stronger-than-forecast payrolls report helped allay investor concerns. At the same time, traders are pricing in little chance of an interest-rate hike from the Federal Reserve anytime soon, with September 2017 being the first month that has even odds of a raise, implying a so-called “Goldilocks” scenario for equities in which the economy expands but at a lukewarm pace to hold off further monetary tightening.

Meanwhile, investors have also sought the safety of Treasuries in the aftermath of the Brexit vote, sending bond yields to record lows last week. Fresh peaks for stocks coupled with all-time lows for bonds is unusual given that they are generally seen as risk-on/risk-off complements. Demand for U.S. bonds has also ramped up amid sub-zero yields in Europe and Japan.

The CBOE Volatility Index edged higher for a second day, even as stocks advanced — a sign investors are still exercising caution. The measure of market turbulence known as the VIX added less than 0.1% to 13.55. A Goldman Sachs Group basket of most shorted shares rose for a fifth day, the longest in fourth months. It was the ninth increase in 10 days, with the gauge up 15% over the span.

“I firmly believe in the efficacy of QE -- I think it works great magic — but I’m a little concerned that we’ve now taken bonds to record low yields and stocks to record highs at the same time,” Zervos said. “Usually, bonds are supposed to hedge equities. What the Fed is doing is running this very hot, and the traditional outcome of that isn’t so hot.”

Investors turn their focus to corporate results this week, with analysts projecting a profit decline of 5.7% at S&P 500 companies in the second quarter. That would make it the fifth straight quarterly drop, the longest streak since 2009. Bank earnings are forecast to slide 11% in the period.

“We’ve been so overwhelmed with larger macro and political issues for the last couple of cycles that we now have the chance to focus on individual companies and see how they’re doing,” said Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments. “That could be very positive for the market.”

A Bloomberg gauge of U.S. airlines soared 6.5% for its strongest one-day gain since November 2014, hoisted in part by American Airlines. The carrier said it expects new credit-card deals with Citigroup and Barclays to boost its pretax income by about $1.55 billion over the next two-and-a-half years. Deutsche Bank also recommended buying shares in the three largest airlines. United Continental Holdings and Delta Air Lines advanced more than 5.4%.

Seagate Technology surged 22%, the steepest since 2011, after saying it will eliminate about 14% of its workforce in an effort to reduce costs to weather a prolonged slump in demand.

R.R. Donnelley & Sons increased 2%, paring an earlier 7.5% climb, after people with knowledge of the matter said Xerox Corp. is in talks to acquire the Chicago-based printing company. Xerox Corp. added 1.8%.

Fastenal lost 3.5% after posting quarterly earnings and sales that missed estimates.

The S&P 500’s main groups that have posted the biggest gains in 2016 -- utility and phone companies — were among the weakest today. The industries, often considered defensive since they pay higher dividends and are less reliant on economic growth, lagged the broader index Tuesday along with consumer-staples companies.

Bloomberg News