By Alexandra Scaggs And Ira Iosebashvili September 17,2014
The five-year bull market in U.S. stocks got a new lease on life, as investors embrace the steady-as-she-goes message the Federal Reserve is delivering on the economy and interest rates.
The Dow Jones Industrial Average rose to a record and the dollar jumped to a six-year high against the yen, after the Fed took tentative steps toward unwinding its historic easy-money policies while reassuring investors that rates will remain low even as the economy expands.
The gains were accompanied by a decline in U.S. government-bond prices that sent Treasury yields higher and a selloff in many emerging-market stocks and currencies. Assets in poorer nations often are hit first when interest rates rise.
Wednesday’s action underscores the investor belief that the Fed will raise interest rates next year, while the European Central Bank and Bank of Japan will continue pushing rates down in a bid to spur struggling economies.
“In the big picture, the Fed is decreasing its balance sheet and looking to tighten policy, while the ECB and Bank of Japan are on the opposite path,” said Kiran Ganesh, a strategist at UBS Wealth Management.
The Dow industrials gained 24.88 points, or 0.1%, to 17156.85. That marked the blue chips’ 16th record of the year and leaves the index up 3.5% in 2014.
Investors said the Fed meeting reinforced demand for the U.S. dollar and riskier investments such as stocks. U.S. government bonds are seen as expensive but also unlikely to post sharp declines, with the Fed taking a measured approach toward pulling back on its easy-money policies.
Ahead of Wednesday’s statement by the Fed, investors had been looking for hints as to how rapidly the central bank would proceed toward reversing its easing efforts. Fed policy has been credited with fueling the five-year-long bull market in stocks and keeping bond yields low.
In its policy statement, the Fed said it expected to keep short-term interest rates near zero for a “considerable time.”
However, the Fed also confirmed that it would end its bond-buying program next month and offered new details on the mechanism it plans to use to raise interest rates when that time comes.
“They’re still working to keep rates low,” said Robert Pavlik, chief market strategist at Banyan Partners, which oversees about $4.5 billion in assets. “They’re not moving on interest rates, so the overall equity market should be pleased with that.
“You wouldn’t see a dramatic uptick in the bond-market yield because they’re giving you a pretty dovish stance,” he said.
Mr. Pavlik has reduced the cash holdings in his portfolio in recent weeks. He has tilted his holdings toward stocks that would particularly benefit from accelerating economic growth because of what he sees as a strengthening U.S. economy.
The S&P 500 index fell just short of a record, rising 2.59 points, or 0.1%, to 2001.57, just 0.3% off its high of 2007.71 hit Sept. 5.
The Nasdaq Composite Index advanced 9.43 points, or 0.2%, to 4562.19.
Currencies saw sharper moves than stocks. Even though the Fed signaled a continued go-slow pace, the gradual shift toward higher rates comes as monetary policy is seen as staying loose in Europe and Japan.
The dollar rose 1.1% against the yen to its strongest level since September 2008, while the euro fell 0.7% versus the greenback, its lowest level in 14 months. Late Wednesday in New York, the dollar bought ¥108.37, from ¥107.13 late Tuesday. The euro bought $1.2865, from $1.2960.
Emerging-market currencies weakened against the dollar as well, with the Turkish lira hitting a six-month low.
As of Friday, the dollar has logged its longest winning streak in more than 17 years, rising against a broad basket of currencies for nine weeks ina row, according to the ICE U.S. Dollar Index. Higher interest rates would make the dollar more attractive to yield-seeking investors.
“The Fed is switching gears and talking about the actual modalities of raising rates,” said Aroop Chatterjee, a strategist at Barclays. “This is a significant change, and it is being reflected in a strengthening dollar.”
Prices of Treasury bonds pulled back after the Fed statement, sending the yield on the 10-year note up to 2.600%. Before the statement, it was trading at 2.564%. Bond yields move inversely to prices.