Accommodative Fed Remains Stock Market’s Best Friend

The major U.S. stock indexes closed mixed last week with the S&P 500 and Nasdaq leading the charge to record closing highs, while the Dow struggled to establish its footing. The rally in the broad-based and technology indexes has been impressive, erasing last year’s early October to late December’s steep decline in less than six months.

In the cash market, the benchmark S&P 500 Index settled at 2939.88, up 1.2%. For the year, it’s up 17.3%. The blue chip Dow Jones Industrial Average closed at 26543.33, down 0.1%. In 2019, it’s up 13.8%. The technology-based Nasdaq Composite Index finished at 8146.40, up 1.9%. It’s up 22.8% this year.

It hasn’t been just one factor driving stocks higher since essentially the first of the year, but rather three factors. A more accommodative stance from the central banks, especially the U.S. Federal Reserve has been the primary driver of the rally. Let’s face it, the flow of easy money since the 2009 financial crisis has impacted the market the most and it’s likely to continue because global interest rates are likely to remain subdued the rest of the year.

Rising Earnings are a second factor helping to sustain the upside momentum in the U.S. markets. Despite predictions that this quarter’s earnings season would be the worst since 2016, corporate profits appear to be on track for small gains in the first quarter. However, we’re not going to get too excited yet because only 40% of the S&P 500 companies have reported.

As brokerage firm Edward Jones states, “Despite some high profile earnings disappointments, corporate profits appear to be on track for small gains in the first quarter, and we expect modest earnings growth to continue. As a result, the price-to-earnings ratio for S&P 500 remains near its long-term average, suggesting stocks aren’t overvalued. And valuations for U.S. small- and mid-cap stocks are more attractive, as they’ve recently lagged, which we think represents an opportunity for investors if appropriate.”

The third factor driving stocks higher is the easing of trade tensions. This has helped erase some of the negative sentiment that was capping stocks earlier this year. Remember that investors hate uncertainty and although no one is certain when a trade deal will be announced between the United States and China, they feel that the process has gone on so long that it’s just a matter of time before it’s announced.

Even with stock prices at such lofty levels, I have a positive outlook on stocks because I believe investors and the Fed learned a lesson from last year’s late sell-off. Stocks may move higher at a slower pace the rest of the year and volatility may even return to normal levels because I’m fairly certain the Fed will remain accommodative, a trade deal will be reached, and stabilizing global economic growth will lift the fear of a recession later this year.