Central banks to the rescue…again
Stocks experienced several violent reversals last week before finishing strong. The Dow Jones Industrial Average climbed 2.32% to end the week at 16,466, while the S&P 500 Index rose 1.78% to 1,940 and the Nasdaq Composite Index advanced 0.49% to 4,613. In fixed income, the yield on the benchmark 10-year U.S. Treasury fell from 2.05% to 1.92% as its price rose.
Stocks continue to find support in an old friend: central bank accommodation, most recently from the Bank of Japan (BoJ). Despite this most recent spike to the proverbial central bank “punch bowl,” we are likely to see continued abrupt swings in financial markets. This is particularly true in those areas that seem crowded, i.e., are particularly expensive. Thus, in the prevailing environment of heightened volatility, momentum remains an unpredictable theme.
Less than zero
In a pattern similar to that seen in the previous week, stocks shrugged off an uneven start to finish strong. Early on, equities were contending with several headwinds: disappointment with the Federal Reserve’s January statement, soft economic data and a mixed start to the fourth-quarter earnings season in the U.S. Headline gross domestic product was a bit soft, although consumption was solid, and the durable goods report was weak. Adding to the pessimism, with over 20% of S&P 500 companies having reported, revenue growth is flat and earnings are down 3.7%.
Still, stocks benefited from the announcement of more aggressive stimulus from the BoJ, which has now followed the European Central Bank (ECB) toward an unconventional negative deposit rate. The BoJ lowered its deposit rate to -0.1% from 0.1%, while maintaining its 80-trillion-yen-per-year asset purchase program. Japanese equities surged on the news, the yen declined sharply and 10-year Japanese government bond yields fell below 0.10%.
Europe also rallied, gaining more than 2% on Friday to finish the week with modest gains. In addition to the tailwind from the BoJ announcement, European stocks are also benefiting from a solid start to earnings season. While still in the early stages, growth in earnings per share stands at 12% year-over-year and sales growth is up by 6%. Roughly 60% of both earnings and revenue announcements have exceeded expectations. This is above the historical average and an improvement over the previous quarter. The stronger undertone in the market has helped to stabilize flows, with European equity exchange traded funds notching inflows for the week.
The synchronized movement of stocks and oil is also persisting, although the reason why is not quite clear. By week’s end, crude had staged a mini-bull market over just seven trading days.