Af­ter a ter­ri­ble start to the year, in­vestors are fi­nally un­do­ing some of the dam­age

Chicago Sun-Times - - MONEY - Adam Shell

The worst start ever for the U. S. stock mar­ket doesn’t seem so bad now fol­low­ing a bounce- back rally that has pulled stocks close to 2% of where they be­gan the year.

The stock mar­ket has done an 180- de­gree turn since bot­tom­ing out in Fe­bru­ary, trim­ming a siz­able 10% de­cline to amore palat­able 2.2% year- to- date loss— a pow­er­ful change in di­rec­tion that one Wall Street firm refers to as the “re­ver­sal of the re­ver­sal.”

Three weeks ago on Feb. 11, in­vestors were scared and the Dow Jones in­dus­trial av­er­age was in free fall , down nearly 1,800 points for the year when it closed at 15,660.18.

But then the tide turned bullish. That same day, JP Mor­gan Chase CEO Jamie Di­mon de­liv­ered a vote of con­fi­dence to his bank’s bat­tered shares and the stock mar­ket in gen­eral when he used his own cash to buy 500,000 shares of stock in the bank he leads. The mar­ket hasn’t looked back.

Most of the fears, head­winds and worse­case sce­nar­ios that weighed on stocks ear­lier in 2016 never ma­te­ri­al­ized, spark­ing a re­lief rally of nearly 1,400 points that has cat­a­pulted the Dow to its first four- day win­ning streak of the year, pow­ered it back above 17,000 for the first time since Jan. 6 and po­si­tioned it within strik­ing dis­tance of break- even for the year.

So what sparked the stock mar­ket turn­around?

A spate of fresh head­lines and eco­nomic data points that de­bunked the no­tion — at least for now — that the fi­nan­cial world was head­ing for an­other mon­u­men­tal fall on par with the 2008 fi­nan­cial cri­sis or 2000 In­ter­net stock melt­down. It’s not as if all that ails the stock mar­ket has been cured, but more about in­vestors down­siz­ing the odds of apoc­a­lyp­tic out­comes.

“The rally has been more about the fad­ing of neg­a­tives rather than the emer­gence of pos­i­tives,” says Bob Doll, chief equity strate­gist at Nu­veen As­set Man­age­ment.

The early- year stock mar­ket swoon, Doll

says, was caused by “un­founded con­cerns about a U. S. re­ces­sion, un­founded con­cerns about de­fla­tion and bad en­ergy loans, overly neg­a­tive views on China’s econ­omy and fears the Fed­eral Re­serve would raise rates five times.”

But none of those ma­jor fears ma­te­ri­al­ized, Doll says.

Job gains in Fe­bru­ary came in stronger than ex­pected, adding to good eco­nomic news ear­lier in the week, in­clud­ing ro­bust auto sales and solid read­ings on both the man­u­fac­tur­ing and ser­vices seg­ments of the econ­omy. The solid data have eased re­ces­sion fears.

Cou­ple that with a sta­bi­liza­tion in oil prices and no ma­jor bad news out of China and you get a mar­ket un­do­ing some of the early- year dam­age. But will the gains stick? Bo Chris­tensen, chief an­a­lyst at Danske In­vest, sees rea­son for op­ti­mism that the bear­ish spell has been bro­ken.

“In our view, the re­ver­sal is sus­tain­able,” Chris­tensen says.

He cites three rea­sons for his op­ti­mism. First, he be­lieves a healthy bank­ing and fi­nan­cial sys­tem will be able to sup­port the U. S. hous­ing mar­ket, con­sumers and strong jobs growth.

Se­cond, he ex­pects China to de­liver “mod­er­ate” stim­u­lus fo­cused on the coun­try’s ail­ing con­struc­tion in­dus­try.

Fi­nally, he ex­pects the Euro­pean Cen­tral Bank to an­nounce fur­ther mon­e­tary eas­ing to boost in­fla­tion and pro­tect the econ­omy from down­side shocks.

An­other plus is that still- slug­gish wage growth in the U. S., de­spite a ro­bust 242,000 new jobs cre­ated in the USA in Fe­bru­ary, is enough to keep the Fed from an ag­gres­sive in­ter­est- rate hike cam­paign, and al­low them to stick to plans to nor­mal­ize rates at a “grad­ual” pace, he adds.

The rally has been more about the fad­ing of neg­a­tives rather than the emer­gence of pos­i­tives.”

Bob Doll, chief equity strate­gist, Nu­veen As­set Man­age­ment

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