U.S. equity markets are on an unmitigated tear, by several measures, but the recent span of buoyancy for equity benchmarks, including a nine-week win streak for the 122-year-old Dow industrials, has produced equal parts wonderment and dread.
Friday’s finish, for one, capped the best start to a year for the Dow Jones Industrial Average DJIA, +0.70% and the S&P 500 index SPX, +0.64% since 1987, according to Dow Jones Market Data, measuring the first 36 trading sessions for those indexes at the beginning of a calendar year. Over that period, the Dow has rallied 11.6%, and the S&P 500 has risen 11.4%.
Dow Jones Market Data
Put another way, the Dow has registered eight consecutive weekly gains in 2019, which it hasn’t done since an interrupted rally to start 1964, when it logged 11 weekly advances.
For the Nasdaq Composite Index COMP, +0.91% which has bounded up 13.45%, over the past 36 trading days, it is the index’s best start to a year since 2012, and the small-capitalization focused Russell 2000 index RUT, +0.92% created in 1984, just logged its longest-ever weekly win streak— eight in a row — to start a year.
However, many investors aren’t exactly striking up the band at stocks’ recent ascension.
“The risky asset rebound does not necessarily mean investors are less concerned about the downside, and evidence abounds of the level of concern,” wrote Carol Zhang and Bruno Braizinha, analysts at Bank of America Merrill Lynch, in research note dated Friday.
Part of the catalyst for gains has been the expectations of progress on the U.S. forging an agreement with China that would end a yearlong tariff dispute between the world’s largest economies, which has threatened to disrupt global economies.
“We’re having good talks, and there’s a chance that something very exciting can happen,” President Donald Trump told reporters at the Oval Office Friday afternoon, following a series of discussions between Chinese and American officials in Washington.
On top of that, the Federal Reserve has communicated that it intends to adopt a more cautious posture in lifting interest rates any further and end the reduction of its balance sheet — for the moment.
Still, anxiety about the health of the U.S. economy and those outside of the U.S. lingers, even if markets appear to have shaken off a late-2018 downturn that culminated in the worst-ever Christmas Eve decline to stage a stunning resurgence.
“The financial markets continue to overlook the weak economic reports. Stocks posted another gain this week, marking the first time since 1964 that stock prices have risen for eight consecutive weeks to start a year,” wrote Bob Schwartz, senior economist at Oxford Economics in a Friday research report.
Concerns about slowing global growth were underscored by the release of surveys from Europe and Japan earlier in the week that showed manufacturing contracting in February, with export-dependent German manufacturers reporting the worst drop in activity in more than six years.
In the U.S., a gauge of manufacturing activity in the Philadelphia area, known popularly as the Philly Fed index, posted its first negative reading since May 2016.
Yet, one sign of complacency, the Cboe Volatility Index VIX, -6.57% known as Wall Street’s “fear index,” has fallen for nine straight weeks to 13.51, representing its longest weekly skid on record. The index is an options-based measure of expected, or implied, volatility over the coming 30-day period and tends to fall as stocks rise, with a reading of 19.5 representing its historical average.
Some view the fear gauge’s current level below 16 as a bullish sign. “If somehow I am completely wrong and this whole huge, epic rally is a bull trap in an ongoing bear market, the VIX would not be below 15,” wrote Paul Schatz, president, Heritage Capital, in a financial blog on Friday.
Source: Paul Schatz
The Vix’s slips beneath 16 level
Genuine concerns remain. A U.S.-China trade deal isn’t assured, and Britain’s stumbles toward exiting from out of Europe’s trade bloc, have the potential to put an end to the unmitigated gains.
That said, yields on the haven benchmark 10-year Treasury note TMUBMUSD10Y, +0.00% haven’t reflected any dire concerns being harbored by fixed-income investors. The 10-year is holding at 2.65%, not far from where it started 2019, with the Fed on pause and inflation subdued. Yields fall as bond prices rise.
What else is on deck next week?
Meanwhile, Federal Reserve Chairman Jerome Powell’s two days of testimony on Congress starting Tuesday likely will be among the highlights of next week’s action.
Powell is likely to put a finer point on the central bank’s plans against the backdrop of the market’s rebound.
Separately, JPMorgan Chase & Co.’s JPM, -0.45% annual analyst and investor meeting on Tuesday, where executives provide a snapshot of the state of the behemoth bank’s businesses, may provide investors more gristle to chew on, if CEO Jamie Dimon offers his own assessment of the market and broader economy.
On the data front, a report on pending home sales is due on Wednesday at 10 a.m. Eastern Time and investors will await a reading of the official scorecard for the U.S. economy, gross domestic product, on Thursday at 8:30 a.m. On Friday, ISM Manufacturing for February and consumer sentiment both due at 10 a.m.
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