Stocks bounce back, but market remains wobbly
After a terrible start to the year, investors are finally undoing some of the damage
The worst start ever for the U.S. stock market doesn’t seem so bad now following a bounce-back rally that has pulled stocks close to 2% of where they began the year.
The stock market has had a remarkable turn since bottoming out in early February, slashing the year-to-date loss to 2.2%, as of Friday’s close, from an anxiety-inducing 10.5% at its low.
Three weeks ago on Feb. 11, fear was in the air after investors had watched the Dow Jones industrial average lose nearly 1,800 points for the year when it closed at 15,660 that day. But then the tide turned bullish. That same day, JPMorgan Chase CEO Jamie Dimon delivered a vote of confidence to his bank’s battered shares and the stock market in general when he used his own cash to buy 500,000 shares of stock in the bank he leads.
Since then, the market hasn’t looked back.
Most of the fears and worsecase scenarios that weighed on stocks earlier in 2016 never ma- terialized. The relief rally has lifted the Dow nearly 1,350 points from its low. Last week, the bluechip barometer scored its first four-day winning streak of the year, closed above 17,000 for the first time since Jan. 6 and ended within striking distance of being break-even for the year.
So what sparked the stock market turnaround?
A spate of fresh headlines and economic data points has debunked the notion — at least for now — that the financial world was heading for another monumental fall on par with the 2008 financial crisis or 2000 Internet stock meltdown. It’s not as if all that ails the stock market has been cured, but more a case of investors now downsizing the odds of apocalyptic outcomes.
“The rally has been more about the fading of negatives rather than the emergence of positives,” says Bob Doll, chief equity strategist at Nuveen Asset Management. The early-year stock swoon, he says, was caused by
The rally has been more about the fading of negatives rather than the emergence of positives.” Bob Doll, chief equity strategist, Nuveen Asset Management
“unfounded concerns about a U.S. recession, deflation and bad energy loans, overly negative views on China’s economy and fears the Federal Reserve would raise rates five times.”
But none of those major fears materialized and are currently on the “back burner,” Doll says.
Job gains in February came in stronger than expected, adding to good economic news earlier in the week, including robust auto sales and solid readings on both the manufacturing and services segments of the economy. The solid data have eased recession fears. Couple that with a stabilization in oil prices and no major bad news out of China, and what you get is a market undoing some of the early-year damage.
The big question is whether the gains will stick. Doll says stocks can prosper if earnings growth picks up and oil prices and the U.S. dollar “behave.”
Bo Christensen, chief analyst at Danske Invest, sees reason for optimism that the bearish spell has been broken.
“In our view the reversal is sustainable,” he says.
Christensen cites three reasons for his optimism. First, he says a healthy U.S. banking and financial system will be able to support the domestic housing market, consumers and strong jobs growth. Second, he expects China to deliver “moderate” stimulus focused on the country’s ailing construction industry. Finally, he expects the European Central Bank to announce further monetary easing to boost still-low inflation and protect the eurozone economy from downside shocks.
Another plus: The still-sluggish wage growth in the U.S. is enough to keep the Fed from an aggressive interest-rate hike campaign and allow them to stick to plans to normalize rates at a “gradual” pace, Christensen says.