A big stock rally kicking off the second quarter, coupled with major first-quarter gains that have ushered indexes to near-record levels (for example, the Dow Jones Industrial Average is within 800 points of its high, and the S&P 500 index landed its biggest first-quarter gain since 1998) are early signals of a bullish market that could help investors, at least in the short term.
Among recent events that could explain the market gains:
- Better-than-expected PMIs for Chinese manufacturing in March appear to have allayed some worries of a slowdown before U.S. monthly job numbers are released later this week. U.S.-China trade talks also are scheduled to resume in Washington, D.C., this week, potentially providing investors more good news.
- Earnings continue to grow and low interest rates support higher valuations.
- This higher market move appears to have caught investor sentiment and positioning off-guard. More positive sentiment and portfolio re-positioning back to equities could bolster the market for a while longer.
- Focus on the yield curve has investors nervous about the long term durability of the economic expansion. It is helpful to remember that the initial inversions of the yield curve generally do not serve as a death knell for stocks, but in fact stocks often continue to rally for months after the first days of inversion.
However, it is also important to read this market bounce within the larger context of events on the horizon and the Federal Reserve’s announcement last week that it would leave rates unchanged through the rest of this year. The Fed also said it plans only one rate hike in 2020 and that it will slow reduction of its balance sheet starting in May and coming to a complete stop in September. In October, the Fed plans to roll its maturing holdings into Treasuries with a cap of $20 billion per month.
When announcing the Fed’s decision, Chairman Jerome Powell cited trade tensions, falling energy prices weighing on inflation and risks from abroad as primary drivers for the Fed outlook of policy stasis. Some U.S. companies are reporting slowdowns, including FedEx Executive Vice President and Chief Financial Officer Alan Graf, Jr., who last week said “… slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in year-over-year decline in our FedEx Express International revenue.”
We are continuing to track these dynamics and plan to explain them in more detail in the next edition of our quarterly market report, The Helm. Please be on the lookout for it.
The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer trading decisions. All expressions of opinion are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of guarantee of future results.