Wow. Stock prices jumped 3% in another volatile week that nearly erased the previous week’s 3.5% thrashing. Anxiety diminished over the possible financial contagion from collapsing ruble and oil prices, and investors were encouraged by the Federal Reserve’s stance on interest rates.
Last week, the Dow Jones Industrial Average jumped 524 points or 3% to 17,804.80. The Standard & Poor’s 500 index gained 68 to 2,070.65, while the Nasdaq Composite index added 112 points, or 2.4%, to 4765.38. The Russell 2000 index of small-caps soared 3.8% to 1195.94.
Wall Street began its ascent before Fed Chair Janet Yellen began her news conference Wednesday afternoon in the U.S. Investor concerns had mounted in recent weeks over the sharp plunges in both oil and the Russian ruble, which fell 16% in just two days last week.
Banks could get hit hard if Russia were to default on its loans or if oil companies would not be able to meet debt payments. By the time American investors came to their desks that Wednesday the ruble and oil rose, and such fears receded—for now. That set the stage for Fed-inspired bigger gains, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The Fed’s statement appeared to appease nervousness about the expected fed-funds rate hike next year. The words “considerable time” were effectively dropped from the statement, and officials can now be “patient.” The FOMC’s median projection for the likely appropriate funds rate at year-end 2015 dropped to 1.12% from 1.37%.
Luschini is surprised that the market interpreted the statement so “dovishly,” and we agree. Yellen was clear that the Fed will begin to raise rates in 2015 and very likely around midyear. James O’Sullivan, chief economist of High Frequency Economics, wrote after the Fed meeting: “The ‘patient’ wording is reminiscent of the change in language in 2004—five months before tightening began.”
The rally “shows that the market is pretty powerful and you have to respect it,” says Richard Weeks, a partner at Hightower Advisors. The small-cap rise last week was healthy too, he says. But, he adds, roiling currency and oil markets “suggest some big forces have been unleashed, forces that will take a long time to reach equilibrium.”
Investors should be wary of the volatile days of recent weeks. It’s hard to understand the race back into stocks that just a few days ago were deemed too expensive by investors.
The remarkable aspect to the rally is that in the past 48 hours the negative catalysts that sparked investor caution over the past couple of weeks “have not passed. They have arguably intensified,” says JonesTrading chief market strategist Mike O’Rourke.
(Source: Barrons Online)