Dovish indications from the Federal Reserve drove equities more than 1% higher last week. The major indexes moved into the black for the first time this year and within shouting distance of all-time highs. Rising oil prices again added fuel to this fifth consecutive weekly rally, while a soft dollar helped big-cap stocks outperform.
After a poor start, it was party on once the Federal Open Market Committee meeting ended on Wednesday. FOMC projections suggested it would raise rates just twice this year, or half a percentage point of tightening in all, instead of the previously expected four hikes, for a full percentage point increase.
Meanwhile, oil rose 2%, to $39.44 per barrel, and flirted briefly with a 40 handle for first time since early December. That has gone a long way to easing fears about global recession.
The Dow Jones Industrial Average tacked on 389 points, or 2.3%, to 17,602.30 last week, while the Standard & Poor’s 500 index rose 27 points, to 2049.58. Both are only 4% below record highs. The Nasdaq increased 1%, to 4795.65.
“Apparently, we are drinking from the never-ending fountain of near-zero interest rates again,” says Kimberly Forrest, senior equity analyst at Fort Pitt Capital Group. The weakening greenback helped the major indexes’ megacaps, which benefit the most from a declining dollar.
“Markets have a short memory when it comes to the bad stuff,” says Steve Sosnick, senior trader at Timber Hill. Complacency seems to have returned, and “that frightens me the most,” he adds. The situation wasn’t as dire as the market had it at February lows, but things aren’t as rosy now as they were the last time the market was at these levels, he says.
The market’s valuation, at 17 times consensus analyst earnings-per-share estimates for 2016, looks stretched again, given that easy monetary policy and rising oil prices—not earnings growth—are responsible.
The multiple that the market pays for stocks will eventually reconnect to lackluster—or worse—earnings-per-share figures. The U.S. isn’t in a recession, but it isn’t growing like it’s capable of, adds Fort Pitt’s Forrest.
We could have more good times until first-quarter results begin to be released in three to four weeks. However, the S&P 500 index’s first-quarter EPS are seen declining 7% after a 3% fall in the final quarter of 2015.
One way the rally could roll on is if value stocks, which have lagged behind growth stocks in the seven-year bull market, pick up the rally baton. Growth stocks, however, would have to at least remain flat.
(Source: Barrons Online)