Photographer: Michael Nagle/Bloomberg

Best U.S. Stocks Rally Since 2014 Fueled by Optimism in Economy

  • S&P 500 has gained 7.3 percent over the past three weeks
  • Payroll and manufacturing data beat expectations this week

Investors spent the first six weeks of the year concerned the economy stood on the precipice of a recession. Now they’re enjoying the best three-week stretch for U.S. stocks since 2014.

The Standard & Poor’s 500 Index jumped 2.7 percent over five days, bringing its run during the past three weeks to 7.3 percent. A surge in hiring delivered a vote of confidence in the world’s largest economy, while oil’s rebound from a 12-year low eased deflation concerns and recent actions in China added to optimism the nation can tamp down volatility that’s roiled global markets. Together, it added up to a third straight week of S&P 500 advances that topped 1.5 percent, the longest stretch with gains of that size since 2009.

“When you move from fears of a recession to ‘Hey, we’re not going to a recession,’ we can get some strong moves,” said Ed Crotty, Seattle-based chief investment officer at Davidson Investment Advisors, which oversees $1.7 billion. “This jobs report is a bit of a follow-through that the economy is not falling apart.”

While better-than-forecast data from manufacturing to construction spending provided the catalyst for the market gains, technical signals accelerated the rally. Chart-watchers saw the S&P 500 close above the index’s average price for the past 50 and 100 days for the first time in 2016, as the index jumped to 1,999.99, 2.2 percent below where it started the year.

The advance took all 10 S&P 500 groups higher, with a 5.8 percent surge in energy shares leading the way. Nine of the 10 best performers in the broader index were oil and gas producers, with Chesapeake Energy Corp. rising 88 percent for the biggest gain. The group capped a 17 percent surge from Jan. 20 that erased its loss for the year. 

The industry’s rebound mirrored a rally in crude oil, which capped a third weekly gain. The resource settled Friday at the highest level in two months after a 22 percent surge from a 12-year low amid speculation the firming economy will bolster demand at the same time government data shows production is declining.

The rebound in the oil patch contributed to gains in financial firms with balance sheets exposed to beaten-down energy shares. Banks had among the biggest declines in the swoon that erased more than $2.5 trillion from equity values to start the year. The group rallied 4.5 percent in the week. Regional banks outperformed, with a jump of 6.2 percent for the best week since November.

A measure of investor anxiety reflects a calming of nerves. The Chicago Board Options Exchange Volatility Index slipped 15 percent in the five days, bringing its three-week decline to 34 percent. The so-called fear gauge closed the week at 16.86, near its lowest level of 2016 and 4 percent below its average over the past year.

The surge in hiring is the best evidence yet that companies are looking past the turmoil in financial markets and weak global growth as American consumers sustain an expansion. It marks a turnaround from earlier in the year when manufacturing sluggishness and declines in corporate profits pushed the probability of a U.S. recession to the highest level since 2013, according to a Bloomberg survey of economists.

Not every indicator pointed toward economic expansion. While manufacturing showed signs of stabilizing, factory orders contracted in February for a fifth straight month. And an unexpected decline in wages took some of the luster off Friday’s jobs report, clouding the Federal Reserve’s monetary-policy path.

For the rally to continue, corporate earnings will have to end a string of three straight quarterly declines, according to Mark Luschini of Janney Montgomery Scott LLC. That’s not forecast to happen until the third quarter of 2016, meaning the streak will reach 15 months. In the seven times earnings have fallen at least that long since 1970, stocks slipped into a bear market in all but one instance, data compiled by Bloomberg and S&P Dow Jones Indices show.

“What’s the catalyst for equity prices to move measurably higher from here unless the profit picture starts to brighten?” said Luschini, chief investment strategist in Philadelphia at Janney Montgomery Scott. “There are motivated sellers that lurk at or slightly above levels today that the bulls are going to have to overcome if this advance is going to materialize into something more durable.”

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