This year, investors have had a
successful run. The chart below shows the performance of the Dow Jones
Industrial Average (DJIA), S&P 500, and Nasdaq. As shown below, the three
indices have gained by more than 10%.
The question among investors is
whether the stocks will continue moving upwards. To answer this question, it is
important to understand why the stocks have continued to rise.
First, the Federal Reserve has
calmed the market by moving from a relatively hawkish tone from a dovish one.
In the past two years, the bank has raised rates eight times and in the
December meeting, their forward guidance showed that they were to raise rates
by two times this year. This led to the massive decline in stocks in December. This
year however, the Fed changed direction and started issuing dovish statements. Their
dot plots have shown that there will be no rate hikes this year. In fact, in
their statements, they have left chances of a rate cut open. In addition, the
officials have said that they will slow down the reduction of the balance sheet.
Second, the US and China are
currently negotiating on a trade deal. While the March 1 deadline passed, there
are reports that the two sides are nearing an agreement. Indications are that
the deal will be signed in the next three to four weeks. To investors, this is
a big deal because it will remove the cloud over slowing trade between the two
biggest economies. The two countries do business worth more than $800 billion
every year.
Third, the corporate earnings for
the third quarter were better than investors were expecting. Companies like
Apple, which had been written-off released better than expected results. In
fact, Apple’s stock has gained by more than 20% this year. Other companies that
have done well are Facebook, Nvidia, Chipotle, and General Motors. Therefore,
investors will now focus on the next earnings season to see whether the
earnings will be better. They will also look for signs whether the slowing
economy has had any impacts on the US stocks. This season will start tomorrow,
with the release of earnings by top banks like Wells Fargo and JP Morgan.
Therefore, in the next few weeks may
determine whether the rally in US stocks will continue. This is because
investors will want to see whether the growth that the companies experienced in
the past year will continue.
Fourth, stocks have done well as
the rest of the world slows. This is because the US seems to be the only
developed country that is seeing some growth. In Europe, the economies are
slowing as the confusion of Brexit continue. In Asia-Pacific, the economies too
are slowing, led by China. The same slowdown is being experienced in the emerging
markets. Therefore, investors believe that the US is the better place to
invest.
Finally, with treasury yields
slowing down, investors have pulled their funds from them to stocks. This has
led to the demand in the financial market to improve.
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