Yellen Caution Sends U.S. Stocks to Weekly Gain as Jobs Surprise

Federal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The House Financial Services Committee

Janet Yellen.

Photographer: Pete Marovich/Bloomberg
  • Fed signals low rates for longer even as economy heats up
  • S&P 500 caps sixth weekly gain in past seven, erases 2016 loss

For stock bulls, Janet Yellen keeps delivering.

Equities rose for the sixth time in seven weeks after the Federal Reserve chair signaled she’s in no rush to tighten amid a sluggish global economy, quashing bets rates will rise in the first half of the year. Even with signs of life in American manufacturing and jobs data that topped estimates adding to optimism in the U.S. economy, traders still don’t expect higher rates until the fourth quarter.

Yellen’s stance that the Fed must “proceed cautiously” assured investors that the Fed will risk letting the economy run hot before raising rates, jolting the Standard & Poor’s 500 Index to its biggest quarterly turnaround in eight decades. The dollar’s weakest month since 2010 and signs oil is stabilizing added to optimism as investors turn attention to earnings for evidence that the recovery is bolstering corporate balance sheets.

“This week belongs to Janet Yellen,” said Quincy Krosby, a market strategist at Prudential Financial Inc., which oversees about $1.2 trillion. “It was her week to take back control over her projections about the trajectory of monetary policy. She clearly moved expectations.”

The S&P 500 increased 1.8 percent over five days to finish the week at 2,072.78, the highest closing level of the year. It’s rallied 13 percent since falling to an almost two-year low on Feb. 11, and ended the first quarter higher by 0.8 percent, the first time since 1933 it finished higher after falling at least 10 percent. The gauge’s 6.6 percent rally in March was the biggest since October.

A weeks-long rebound in equities, spurred by unambiguous signals that global central banks will do what’s needed to spur growth, had faltered amid concern that the Fed stood ready to raise rates at any meeting. Yellen torpedoed that notion in her speech Tuesday. Stocks shot higher with Treasuries, while the dollar sank as traders pared bets for the timing of the next rate hike. Contracts still only show a 61 percent likelihood of an increase by year-end.

The odds barely budged Friday, even as data showed payrolls and average hourly earnings rose more than forecast and the first expansion in American manufacturing in seven months. Equities gained as investors speculated the Fed will let the U.S. economy grow without changing its monetary policy.

“It’s a very good number overall but doesn’t really change the Fed outlook, particularly in light of Yellen’s outlook and comments,” Jon Adams, portfolio manager at BMO Global Asset Management in Chicago, where he helps oversee $217 billion, said of the jobs data. “The weaker dollar over the last couple of months will help as well, as will stabilization in energy prices.”

The S&P 500’s five-day gain took nine out of 10 groups higher, with a 2.7 percent increase in technology shares leading the way. Consumer shares added at least 2.5 percent, while financial stocks climbed 1.7 percent.

A measure of investor anxiety reflected a calming of nerves. The Chicago Board Options Exchange Volatility Index decreased 11 percent in the five days. The so-called fear gauge has fallen 48 percent over the last seven weeks. It closed the week at 13.10, its lowest level of 2016 and 26 percent below its average over the past year.

Earnings season kicks off April 11 with Alcoa Inc.’s results. Earnings are forecast to fall by 9.5 percent among S&P 500 companies. Strategists remain bullish, estimating the index will climb another 3.7 percent to 2,150 by the end of the year, according to the median of a Bloomberg survey.

Since the Feb. 11 market bottom, the S&P 500 is being influenced to the upside by a greater number of stocks. The index has trailed its equal-weighted counterpart by 2.8 percentage points since then. Conversely, as the market got off to its worst-ever start to a year, the equal-weighted index declined more than the benchmark S&P.

“It’s significant that we’ve retraced the year-to-date declines,” said Krosby. “The breadth in the market is stronger than we saw, for example, in August -- that’s also much healthier for the market.”

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