With another strong close last week, the U.S. stock market has produced a melt-up, soaring 13% from its Oct. 15 lows in little more than a month. Both major indexes finished at all-time highs Friday. There is a palpable sense among market participants that equities will likely rally through to year end, historically a bullish period for stocks.

Beaten-down sectors such as materials and energy led the way. Trading activity was lackluster. The rally’s proximate causes were monetary-easing developments in China and Europe on Friday. Yet there appears to be a growing appreciation for what the big decline in oil prices might mean for the U.S. economy.

Should that drop in energy prices be sustained, says Jason Weisberg, a partner at Seaport Securities, it will have “collateral benefits” across many sectors. It’s good for corporate margins—excluding energy firms—and is an effective tax cut for consumers, he says. “A significant cost in people’s lives has gone down and they will be able to spend on things they have put off,” adds Weisberg, who’s betting on a good fourth quarter of consumer spending.

The Chinese central bank surprised investors Friday by reducing one-year benchmark lending rates—the first drop in more than two years—in an attempt to stimulate faster growth. The same day European Central Bank president Mario Draghi said the ECB was prepared to do more to expand asset purchases, which inject liquidity into eurozone economies. The ECB said it started buying asset-backed securities to encourage banks to make loans and spur economic growth.

Last week the Dow Jones Industrial Average jumped 175 points or 1% to 17,810.06 and the S&P 500 index rose 24 2,063.50. Both were new highs. The Nasdaq Composite index rose 24 or 0.5% to 4712.97. The Russell 2000 index finished at 1172.42, little changed. The small-cap index has outperformed the big caps since mid-October’s lows.

It was another central-bank-fueled run, says Keith Bliss, director of sales at broker-dealer Cuttone. “Any time you’ve got one of the top five central banks signaling easing, the trade is simple, up.” It’s clear to investors, too, that the big central banks, including the Federal Reserve, will remain accommodative.

There’s been a change in investment direction, adds Michael Marrale, head of research, sales, and trading at Investment Technology Group. “A lot of cash left the market in the massive de-risking” by both institutional and individual investors in the October decline, he says. Some, but not all, has come back, and the focus now is U.S. small caps instead of European and emerging-market names, Marrale says.

(Source: Barrons Online)