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Date Posted: 06:27:09 05/22/13 Wed
Author: Tuesday 21/5/2013
Subject: Goldman Sachs

U.S. Stocks On Pace for Another Tuesday Advance, Thanks to Fed
22/05/2013 5:48AM

By Jonathan Cheng

Signals that the Federal Reserve remains far from winding down its bond purchases, combined with a bullish outlook from Goldman Sachs, helped push stocks toward another winning Tuesday.

The Dow Jones Industrial Average gained 68 points, or 0.4%, to 15404 in late-Tuesday trading, putting the blue-chip measure on pace for another record high--and an unprecedented 19th consecutive Tuesday of gains. The Standard & Poor's 500-stock index, meanwhile, added five points, or 0.3%, to 1671, while the Nasdaq Composite climbed 10 points, or 0.3%, to 3507.

Leading the gains were health-care, consumer-discretionary and financial stocks, while telecommunications and technology shares weighed on the downside.

Home Depot jumped 2.8% after the home-improvement retailer reported quarterly earnings and revenue that topped forecasts, while raising its full-year outlook amid the housing market's recovery.

J.P. Morgan Chase was also strong, tacking on 1.5% after Chairman and Chief Executive James Dimon survived a proposal to split his two roles at a shareholder meeting in Tampa, Fla.

But Merck led the Dow components with a rise of 4.5%, amid a broad gain in health-care stocks. Medtronic rose 5% after the medical-devices company reported better-than-expected revenue and margins.

Weighing on the downside, Travelers dropped 2.1% amid general weakness among insurers. Verizon Communications and AT&T also retreated, 1.3% and 0.9% respectively, after Sprint Nextel boosted its offer for Clearwire by 14% in its efforts to win over vigorous opposition to the deal. Sprint Nextel rose 1% while Clearwire jumped 4.6%.

Helping lift broad market sentiment were speeches by two regional Fed presidents, James Bullard and William Dudley, who helped assuage investor concerns that the Fed was leaning toward winding down its stimulus efforts. Mr. Bullard said the central bank's economic-stimulus program has been "effective" and expressed his support for continuing with the current program, while Mr. Dudley said the Fed could tweak asset purchases in either direction.

On Wednesday, Fed Chairman Ben Bernanke is scheduled to testify before Congress, and the minutes of the most recent meeting of the Fed's monetary-policy committee are to be released.

The optimism also was helped by Goldman Sachs, which upgraded its year-end target for the S&P 500 to 1750, after coming into the year predicting the S&P 500 would finish 2013 at 1575. (In March, the investment bank had upgraded its target to 1625.)

In an interview, David Kostin, Goldman's chief U.S. equity strategist, cited growing confidence in the U.S. recovery and said he expects higher-than-expected dividends from S&P 500 companies to draw yield-starved investors to stocks. In particular, he sees the biggest gains coming in technology, financial and consumer-discretionary shares.

"We haven't changed our earnings forecast," Mr. Kostin said. "It's been about a valuation readjustment, and the biggest reason for that is the extremely low interest-rate environment, which helps dividends and stocks more generally."

Mr. Kostin said Goldman expects the Fed to continue stimulating the economy in some form for at least the next year, with no increase in short-term interest rates until 2016. "Rates will stay low for a long time," he said.

Some investors questioned whether current valuations could be sustained, given an already powerful rally that has pushed the Dow industrials and the S&P 500 up 17% so far this year.

"When I look at new stocks, it's just getting more difficult to find those that have attractive amounts of upside left," says Peter Tuz, president of Chase Investment Counsel, which manages about $600 million in Charlottesville, Va. Like many fund managers, Mr. Tuz uses a "screen" to filter out stocks that he views as too expensive, or those that are otherwise unattractive to him.

"We do these screens every week, and there are fewer and fewer companies on those screens, and that could be the sign of a topping-out of the market," Mr. Tuz said.

European stocks reversed earlier declines, with the Stoxx Europe 600 finishing at a new five-year high with a gain of 0.1%. Helping lend some support, Germany's Bundesbank said the country's economy is expected to recover at a faster pace in the second quarter, boosted by signs of improvement in the industrial sector.

Asian markets traded mixed. Japan's Nikkei Stock Average erased early losses to close up 0.1% to a new five-year high, in response to a decline in the yen.

Crude-oil futures fell 0.6% to $96.16 a barrel, while gold futures lost 0.5% to $1,377.80 an ounce. The dollar fell against the euro while ticking higher against the yen. Demand for Treasurys rose, pushing the yield on the benchmark 10-year note down to 1.944%.

In other stock-market action, Apple pared earlier declines to trade 0.4% lower after CEO Tim Cook and his deputies answered questions from Congress regarding the company's offshore tax practices. Senate investigators found Apple paid little or no corporate income tax to any national government on tens of billions of dollars in overseas income over the past four years.

Best Buy fell 3.7% after the consumer-electronics retailer's quarterly revenue came in weaker than expected.

Carnival lost 4.3% after the cruise-line operator cut its full-year guidance, citing voyage cancellations and increased costs.


Write to Jonathan Cheng at jonathan.cheng@wsj.com


(END) Dow Jones Newswires

May 21, 2013 15:48 ET (19:48 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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