Why Dow has nailed 2000 points since Christmas Eve

Dow has nailed about 2,100 points, or 10% since Christmas Eve. Oil prices increase twice as much. Even risky junk bonds have joined the party.

"Suddenly the mood has changed," said David Joy, marketing director at Ameriprise Financial.

Proof of an economic downturn triggered the worst December stock market since the Great Depression. Nasdaq threw itself into a bear market. S & P 500 almost followed.

Investors were worried that a record $ 84 billion was being shot out by global funds over the six weeks ending January 2, according to EPFR data. Exodus surpassed the previous six-week high that was reached during the financial crisis in 2008, according to UBS.

"Warehouse went too far. The market was pricing in a recession ̵[ads1]1; but basically did not support it," Joy said.

Powell changes his tune

The Fed played a key role in both the market route and the subsequent rebound.

The Dow peaked at 26,828 on October 3, the day Fed boss Jerome Powell told PBS that interest rates are "far from" neutral, which is the level at which they do not lower or increase the economy. Investors were anxious that the Fed increased borrowing costs faster than the economy could cope with.
Powell added the jitter on December 19 when he signaled little flexibility in the Fed's guidelines.
But the Fed has since come to rescue by offering more calming guidance. On January 4, Powell promised that the Fed would be "patient" as it sees the economy evolving. He added that the Fed is "always prepared" to shift its attitude if necessary. These comments helped drive Dow 747 points, or 3.3%.

"The Fed was the primary cause of the decline – and for reversal in sentiment," said Joy.

VIX (VIX) volatility index died on Wednesday below 20 for the first time in a month. And the CNN Business Fear & Greed Index has finally moved out of "extreme fear."

Nevertheless, stocks have a long way to go before you restore the entire ground lost under the slide. Dow remains nearly 3,000 points away from record highs.

Job Report, Valuation Help

The report in December worked relieved financial jitters by showing that the US labor market was very strong at the end of 2018. US companies added 312,000 jobs last month, blowing estimates.

Of course, the job report is considered a concurrent or delayed indicator. Several forward-looking meters, especially the ISM production report, point to potential issues ahead.

The commercial war is the major X factor. Investors were encouraged this week by trade negotiations in Beijing which unexpectedly stretched into a third day.

US officials did not make clear on a statement Wednesday how much progress was made. But Wall Street hopes that financial and market failures in both the United States and China will force the two sides to reach an agreement.

Oil price, junk bonds rally

In retrospect, it is clear that Christmas Eve massacre on Wall Street brought stocks to unsustainably low levels.

"Unless the United States was about to fall into recession, it was highly likely that the market had gone too far and would return," wrote David Kelly, global chief strategist at JPMorgan Funds, to clients Monday.

S & P 500 dropped to just 13.5 times forecast earnings, well below the 25-year average of 16.1, according to Kelly.

At these multiples, even some bears turned around for bargains.

"The values ​​have reached an attractive level on the index level for the first time this year," wrote Michael Wilson, chief US stock strategist at Morgan Stanley, in a report on Monday. Wilson was warning of a decline in the market for several months.

Selling may also have been exaggerated in the oil plate. US oil prices climbed back over $ 50 a barrel on Wednesday, leaving them on track for an eight-day win. It has not happened since July 2017.

Even unwanted bonds have benefited from the recovery. After losing ground last year, US high yield bonds have returned 2.6% so far in 2019. This is the best start of the year since 2009, according to UBS.

More "obstacles" to clear

So is it safe to say that the market correction is over? Maybe not.

The market is likely to come under renewed pressure if trade negotiations in the US and China fall, and the Fed sounds a more aggressive tone, or the global economy slows down more than feared.

The bottom process is usually cluttered, with markets often tested again in previous downs.

"It is a strong rebound and very encouraging – but not decisive. You have to be a little careful," said Ameriprise's Joy.

Wilson warned of further "obstacles" to remove, including more negative economic and earnings data and the need for the Fed to shift from one more dovish tone to more bold action.

"We don't think it's time to blow the clear signal yet," he wrote.

Source link

Back to top button