The U.S. economy may not be feeling frisky, but stocks are
Stocks in the U.S are again testing all-time highs even as the U.S. economy gears down. Why? The answer: Unlike Main Street, Wall Street runs largely on expectations -- and often better than bad in financial markets is good enough.
At the end of 2018, investors and analysts were bracing for escalating interest rates, stunted corporate profits and possibly even an incipient recession. It hasn't happened. Worries of a downturn have dissipated even as the economy cools. While companies are reporting growth in the single digits, that's at least stronger than the previously even dourer projections.
As Michael Arone, chief investment strategist at State Street Global Advisors, put it: "There's relief that earnings won't be as bad as anticipated."
As of Wednesday, the S&P 500 was just 23 points off the benchmark index's record finish of 2,930.75 on Sept. 20, 2018, while the Dow and tech-heavy Nasdaq are both 1.3 percent shy of their previous highs in October and August of last year, respectively. "We do think the rally is justified. You have to step back and access what led to the selloff," said Jim McDonald, chief investment strategist at Northern Trust.
When the worst didn't materialize, relieved investors pushed equities higher. "It's amazing how much sentiment has changed when the reality is not much has changed, other than the Fed stance on interest rates," Nick Raich, CEO of the Earnings Scout, told CBS MoneyWatch.
Here's a rundown of why market analysts say stocks could stay hot:
Low bar
Raich notes that of Tuesday morning some 42 S&P 500 companies had reported first-quarter earnings-per-share growth of 4.2 percent -- a sharp drop from the double-digit growth that had prevailed over the last three quarters. Notably, however, most of those companies exceeded estimates.
"Three words: 'Better than feared' -- that sums everything up this year," Raich said. "At the end of last year, there was so much fear of recession or that the Fed would break the economy by raising interest rates."
"The bar got so low, companies are tripping over expectations," he added.
The "R" word
Recession fears drove stocks sharply lower in the final months of 2018. Yet while the economy has undeniably moved down a notch this year, the fact that things seemed so much worse only a few weeks ago has Wall Street whistling a happy tune. Today, only 6 percent of fund managers expect a recession this year, according to Bank of America Merrill Lynch.
"Recession fears are falling as the data continues to signal a slowdown in growth, but not a contraction," Arone said.
Thanks, Fed
Even as 2018 wound down, Federal Reserve Chairman Jerome Powell and other central bank officials seemed determined to cling to their previous policy of hiking interest rates to ward off inflation and more broadly normalize monetary policy. But with growth edging down this year and inflation nowhere in sight, that plan is off the table for now.
The central bank in January signaled a halt to its period of hiking interest rates, lifting a range of financial assets. "All you had to do was buy indiscriminately and you'd have a positive run," Arone said. A clear impact of the Fed's about-face can be seen in homebuilder stocks, which fell 26 percent last year -- this year, the same stocks are already up 25 percent, offered McDonald.
Soft landing
The world's second-biggest economy is stabilizing thanks to massive stimulus by the Chinese government. "When China struggles, Apple sells less iPhones," said Raich, who noted similar impacts on other multinational companies like Caterpillar and Starbucks. But fears of a hard landing have abated, especially as investors grow more confident that the U.S. and China will soon resolve their simmering dispute over trade issues.