Seesaw Week Ends on the Upside
U.S. stocks experienced dramatic swings last week, but ended sharply higher. Leading the major indexes, the Nasdaq Composite Index gained 3.18% to close the week at 5,026, continuing its push toward its previous record. Meanwhile, the S&P 500 climbed 2.68% to 2,108, within 1% of a new high, and the Dow Jones Industrial Average rose 2.13% to 18,127. As for bonds, the yield on the 10-year Treasury fell from 2.12% to 1.93% as its price correspondingly rose.
Although growth is not materializing as expected, investors are taking solace in the fact that low inflation and the moderating economic growth may lead the Federal Reserve (Fed) to increase interest rates at a slower, gentler pace.
When Bad News Is Good News
Given the current backdrop, what is notable is how stocks are advancing. Though select segments of the economy are performing well, last week’s rally was more a function of slow growth rather than a booming economy.
Investors started the year with this thesis: U.S. growth would drive company earnings higher, which in turn would push stocks higher. So far this year, events have not played to script. Instead, a rising dollar has forced analysts to lower their forecasts of companies’ earnings, with Tiffany the latest example of an export-dependent company struggling with a rapidly appreciating currency.
At the same time, the abrupt rise in the dollar has coincided with a slowdown in U.S. manufacturing and business sentiment, although a brutally cold February and a West Coast port strike are also to blame. With the notable exception of the labor market, U.S. economic data are generally running below expectations , to the point where an index of economic surprises is now at its lowest level since 2009.
However, rather than sell stocks, investors are once again treating bad news as good. Stocks rallied last Monday following a weak industrial production report, and investors used Wednesday’s Fed announcement as another excuse to bid up equities. Despite the removal of the word “patient” from its statement, which indicated the strong likelihood of higher interest rates this year, investors reacted positively to the Fed’s comments. While the statement sets the stage for a normalization in interest rates later this year, the central bank’s recognition of the recent economic softness was interpreted as a dovish stance