The Standard & Poor’s 500 scored its best advance for the first six months of the year in 15 years, as US stocks closed out a strong first half, despite losses this month because of worries over monetary tightening.
The plodding US economic recovery brought investors average gains of more than 12 percent for the six months, helped by the US Federal Reserve’s easy money policy, but also underpinned by strong corporate profits.
Fresh records for the S&P and the Dow Jones Industrial Average confirmed the complete recovery, at least for stocks, from the crisis of 2008. The return of small investors to the markets also fed a jump in new stock offerings and mergers and acquisitions, both at multiyear highs as Wall Street got much of its pre-crash mojo back.
It turned US shares into the world’s best performer among major markets, while Europe sagged and emerging markets lost nearly 11 percent.
The S&P 500 put on 12.6 percent in the January-to-June period, the strongest first-half performance since 1998. The Dow blue chips did even better, rising 13.8 percent — their best for the period in 14 years — while the NASDAQ Composite rose 12.7 percent.
The gains held despite index losses of more than 3 percent this month, as the future of the Fed’s quantitative easing (QE) easy money policy came into question and bond yields jumped amid expectations of higher interest rates.
However, this month will likely be seen as a turning point for market sentiment, with investors more cautious and focused on corporate earnings and monetary police, rather than the momentum of money itself.
Fed Chairman Ben Bernanke’s comments that a tapering of the US$85 billion a month QE bond purchases — aimed at holding interest rates down — could begin in September and the purchases be fully wound up in the middle of next year, spurred speculation that the Fed could actually begin raising its ultra-low interest rates by next year.
That sparked a sweeping downward repricing of bonds and stocks by the end of the first half. Dividend plays such as telecoms and utilities were the hardest hit. With the 10-year Treasury bond yield jumping from 1.48 percent at the beginning of the year to 2.48 percent by the end of this month, conservative investors jettisoned such shares.
Also dumped in the past two months were some key commodity stocks, especially gold, both on the rise in rates and the slowdown in China and other emerging markets.
However, as the slight rebound in the final week of this month showed, not all were convinced of the prospect of real monetary tightening by the Fed — a view fed officials were taking pains to reinforce throughout the week.
Top allies of Bernanke stressed that markets had overreacted to the tapering comments, adding that everything depended on whether economic growth picks up from the sub-2 percent annual pace of the first half.
Fed Bank of New York president William Dudley said market expectations had gotten “quite out of sync” with the thinking of Fed policymakers.
Analysts were cautiously optimistic about the rest of the year.
“It appears as if the Fed is doing everything that it can to indicate ‘we are not looking to slow the economy, just reduce the stimulus,’” Sam Stovall of Standard & Poor’s Capital IQ said.
“We might find that the market moves higher in the beginning of July as investors buy back all of the shares that were beaten up in June,” he said.
Hugh Johnson of Hugh Johnson Advisors said the slight rise in the final week of this month could be described as “the restoration of sanity” after several rocky weeks.
Initial public offering (IPO) industry expert Renaissance Capital said there was still enough strength in the markets to support more new issues, after 61 companies went public in the second quarter, the most active quarter in nearly six years.
“Though the Fed’s hints at a retreat from stimulus efforts brought a dose of renewed volatility to the markets last week, investors showed a willingness to continue putting money to work in IPOs, as long as valuations were adjusted,” the firm said.
Most expect a slow market for the coming week, shortened by the Fourth of July holiday.