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Is a Meteoric Rise Awaiting?

March 31, 2019

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In one spectacular quarter, the U.S. stock market has almost fully recovered from its 2018 correction with the Dow Jones nearing 26,000 points and the S&P 500 surpassing November levels.

Since December 24, the Dow Jones has rebounded from 21,792 points to 25,928 points by 18.9 percent and the S&P 500 demonstrated a similar performance, rising from 2,351 points to 2,834 points by 20 percent.

Strong recovery of the Dow Jones since December, recording a 18.9% increase (source: Yahoo Finance)

While strategists remain cautious on the near-term performance of the Dow due to geopolitical risks arising from the U.S.-China trade war and the weakening economy of the eurozone, the strength of the U.S. market could establish a robust foundation for a rally throughout 2019.

Biggest Quarterly Gain For the Dow and S&P 500

According to the WSJ, the U.S. stock market recorded its biggest quarterly gain in about a decade, primarily triggered by the highly anticipated decision of the Federal Reserve to maintain its benchmark interest rate until the year’s end.

A key concern for many investors in recent weeks has been the rapid rise in the value of stocks within a short time frame that could reduce some of the appetite of retail investors in the U.S. market.

In December, many investors re-entered their positions in the U.S. stock market essentially out of fear of missing out, or FOMO, as the Dow nearly reached bear market levels in the 21,000-point region.

Earlier this week, Ladenburg Thalmann Asset Management CEO Phil Blancato suggested that while investors oversold equities in December, throughout January and February, many investors overbought.

For the momentum of the Dow and the rest of the U.S. market to continue, a strong stimulus would be needed amidst the global economic downturn.

“The irrational moment of December was just that, a moment driven by tax selling, algorithms and people being extremely emotional about the headlines. While December was oversold, January and February were overbought. The reason why is, while stocks got cheap for a brief amount of time, the economy is not strong enough to drive a 12 percent return on the stock market in an environment like this,” Blancato said.

There are hopes that the stimulus could be a comprehensive deal with China which reportedly is at its final stage of compromising on industrial policy changes and enforcement strategies of the trade deal.

Some have speculated that the struggle of the domestic economy of China could push both negotiators for a deal in the months to come.

The proposal of some Federal Reserve officials to extend its decision to maintain its benchmark interest rate until 2020 could also fuel the confidence of investors in the stock market.

On March 25, Chicago Federal Reserve President Charles Evans said that he does not foresee a rate increase until the second half of 2020.

UBS Global Wealth Management chief investment officer Mike Ryan told the WSJ that the officials of the Federal Reserve are finally acknowledging global economic data and the expectations of investors in the U.S.

The abrupt decline of the Dow and the S&P 500 in December is said to have been caused by the fear of investors regarding a potential rate hike, which seems highly unlikely to occur at this point until the year’s end.

Not All Optimistic

The Dow has tested the 26,000-point level throughout the past month and has remained relatively stable right below 26,000 points.

Some strategists do not anticipate the Dow to recover beyond key levels in the short-term due to the lack of stimuli in the domestic market.

“We’re not anticipating that we’re going to see a big enough earnings surprise to boost stock prices much higher than they are now,” Tracie McMillion, head of global asset-allocation strategy for Wells Fargo Investment Institute, said.

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