US stocks rose sharply on Tuesday, a day before the start of a crucial Federal Reserve meeting.
Policymakers at the U.S. central bank will convene a two-day meeting on Wednesday and may decide to raise interest rates for the first time in close to a decade.
Opinions are divided among investors and economists as to whether the Fed will, or even should, raise interest rates this month. On the one hand, hiring in the U.S. is continuing to improve and the housing market is recovering. On the other, there are signs that weakness in the global economy could impact the U.S. economy.
Fed policymakers have kept the central bank’s benchmark rate close to zero for almost seven years, supporting both the economy and the stock market.
The sharp gains on Tuesday came after some mixed reports that showed weakness in some parts of the economy. While retail sales edged higher last month, factory output fell in the same period as automakers cut back on production. A New York Fed survey showed that factory activity in New York state sank for a second straight month in September.
”It’s almost as if the market believes the Fed isn’t going to do anything on Thursday. That’s why people are bidding it up,” said Kevin Mahn, Chief Investment Officer at Hennion & Walsh Asset Management in New Jersey. ”However, I do believe (raising rates) would be the right thing for the economy…it’s time.”
The Dow Jones industrial average climbed 228.89 points, or 1.4 percent, to 16,599.85. The Standard & Poor’s 500 index climbed 25.06 points, or 1.3 percent, to 1,978.09. The Nasdaq composite advanced 54.76 points, or 1.1 percent, to 4,860.52.
The gains were led by industrial stocks. The sector had been among those hit worst by the recent global sell-off as investors worried about the outlook for global demand.
”People have been overly pessimistic on global growth,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. ”I think they are going to be surprised….you are going to see a little bit more stability.”
The stock market has recovered some of its losses in August and early September, but is still down from its peak of the year as traders and investors fret about the possible impact of slower growth in China and other emerging markets. The S&P 500 has dropped 7.2 percent from its record close set in May.
Despite the bounce Tuesday, some investors believe that the market’s slump may yet have some way to run.
Michael Ball, President of Weatherstone Capital Management, is playing it safe by holding more cash. He says that the outlook for stocks is deteriorating against a backdrop of moderately rising interest rates and the prospect of weakening corporate earnings.
”Frankly, we are very concerned about the market,” said Ball. ”You may get a bounce out of here, but without improving earnings and better global economic growth, it may be short-lived.”
Earnings for S&P 500 companies are expected to slump 4.1 percent in the third-quarter, according to S&P Capital IQ.
Energy stocks got a lift on Tuesday as oil prices rose.
The price of oil rose on further signs of declining oil production in the U.S. The price of U.S. oil rose 59 cents to $44.59 a barrel. Brent crude, a benchmark for many international types of oil imported into the U.S., gained 26 cents to $46.63 a barrel.
In government bond trading, prices fell. The yield on the 10-year Treasury note rose to 2.29 percent from 2.18 percent on Monday. The dollar rose to 120.42 yen from 120.30 yen late Monday. The euro dropped to $1.1272 from $1.1309.
In metals trading, gold fell $5.10 to $1,102.60 an ounce. Silver fell 4 cents to $14.33 an ounce and copper gained 2 cents to $2.43 a pound.