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US Stock Market: V-Shaped Rally Continues for Ninth Week

The major U.S. equities indexes finished higher last week. The S&P 500 Index was up for the fourth straight week, while the Dow Jones Industrial Average and NASDAQ Composite posted their ninth consecutive weekly gains. In another bullish side, the emerging market indexes outperformed the larger-cap indexes. Furthermore, downside risks continued to be dampened. According to FactSet, the S&P 500 Index hasn’t experienced a decline of 1% or more for the last 20 trading days.

In the cash market for the week, the benchmark S&P 500 Index settled at 2792.67, up 0.6%. For the year, it’s up 11.4%. The blue chip Dow Jones Industrial Average closed at 26031.81, up 0.6%. It’s up 11.6% in 2019 and the NASDAQ Composite Index finished at 7527.55, up 0.7%. It’s up 13.4% this year.

Four Factors Driving Stocks Higher

Since the late December bottom, four factors have been primarily behind the steep advance:  1) Stabilization of crude oil prices, 2) Positive developments over U.S.-China trade relations 3) A dovish Federal Reserve, which is willing to be “patient” before raising rates, 4) Better-than-expected fourth quarter earnings reports.

Will Torrid Rally Continue?

Dovish Fed commentary and hopes of a U.S.-China trade deal were the primary drivers of the rally last week. Investors were optimistic enough to ignore mixed U.S. economic data. Chart-watchers will note that the current rally has taken on a “V”-Shape. Following the steep decline from October 2018 to December 2019, those who did not panic during the sell-off and those who ignored warnings about an upcoming recession because of the flipping of short-term interest rates, have been somewhat rewarded with more than 62% of the decline recovered.

During the worst of the decline, stocks were down 19.8% from their late September high. In December alone, before reaching bottom, stocks were down more than 15%. Investors were dumping stocks for a number of reasons including political uncertainties, a slowing global economy, an impending U.S. recession, but most of all, worries the Fed was tightening too fast.

Since then the stock market is up more than 18% over the past two months, according to FactSet. Annualizing that performance would produce a market return of 190% for the year. So the answer to the question is, no. The torrid pace will not continue.

The rally could ease once a U.S.-China deal is struck and after investors have digested the details. If the global economy and especially the U.S. economy begins to recover as China’s economy begins to pick-up then look for the Fed to start talking again about hiking rates. This in itself could lead to a flattening of the rally later this year, and the return to a more traditional “W” chart pattern.

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