Earnings, Algorithms No Match for Yellen as Stocks Jump in Week

  • The S&P 500 rises 1.2 percent and nearly erases Sept. 9 rout
  • Nasdaq stocks reach records as dividend-payers also advance

The Federal Reserve may not be the only thing obsessing U.S. investors these days. But going by the rally that followed Janet Yellen’s decision to hold interest rates steady, it’s the biggest thing.

Throwing off concerns ranging from falling earnings to the machinations of automated traders, the S&P 500 Index surged 1.2 percent this week, the biggest gain in more than two months. Even after a drop Friday, the benchmark gauge for American equity ended less than 1 percent from its level before rate paranoia spurred the biggest selloff since Brexit on Sept. 9.

The Nasdaq Composite Index rose 1.2 percent and closed at a record on Thursday. Boosted by the Federal Reserve’s inaction, dividend payers and companies benefiting from a weaker dollar led the week’s gains. The S&P 500’s newest group, real estate, surged more than 4 percent, its best performance since July.

For analysts trying to gauge the market’s most proximate threat, this week’s rally was evidence that investors can live with the declining earnings and soaring valuations as long as Yellen’s Fed is at heel. The market showed few signs of being roiled by the robotic selling among automated funds and risk-parity managers, a concern hypothesized by everyone from Bank of America Corp. to JPMorgan Chase & Co. in the wake of the Sept. 9 rout.

At the same time, getting out from under the valuation cloud gets harder every time the market goes up. It raises the pressure on companies to hit analysts’ forecast for 13 percent profit growth in 2017, an increase that has rarely been seen in the past two decades. Possibly reflecting that, about $2.2 billion was pulled from an exchange-traded fund tracking the S&P 500 this week.

“It seems like the central banks have things under control, they’ve really pushed out the volatility for the moment,” said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets. “As long as the Fed can keep things steady, like they are today, we’re going to have continued moves in a positive way in both equities and bonds because they’re basically saying there’s nothing else in the world to invest in.”

The Fed opted to wait for further evidence of stronger inflation before raising rates, even as the economy showed signs of improving. It also scaled back the number of increases it expects in 2017. That decision assuaged fears of resurfacing volatility, at least for now. The CBOE Volatility Index, a measure of market volatility, fell 20 percent, it’s most since July 1.

Strategists are also turning more upbeat. JPMorgan Chase & Co.’s Dubravko Lakos-Bujas and Bank of Montreal’s Brian Belski boosted their S&P 500 year-end projections. Lakos-Bujas, one of the biggest bears in a Bloomberg survey, increased his estimate by 100 points to 2,100, while the BMO strategist now sees the S&P 500 climbing 3.9 percent to 2,250, up from his call of 2,100.

“By not hiking rates, the Fed provided the markets with precisely what they had been expecting, and in doing so, removed a significant downside surprise,” Belski, chief investment strategist at BMO Capital Markets, wrote in a note to clients Thursday. “As a result, we see no catalyst for a major market correction or meltdown between now and year-end.”

Investors now turn their attention to the corporate earnings season that gets underway in about three weeks, with technology companies expected to report profits 3.5 percent higher than a year ago, according to analysts surveyed by Bloomberg. The Nasdaq 100 Index ended Thursday at a record, logging the 12th fresh high this year, the most since before the dot-com bubble. Since the Brexit vote in late June, Apple Inc., Microsoft Corp., Facebook Inc. and Google parent Alphabet Inc. count for more than a quarter of the S&P 500’s advance.

Real-estate investment trusts also made their debut as a top-level industry in the S&P 500. The 11th group finished the five days with the biggest gain in the index, as REITs, coveted for their high payouts while Treasury yields languish, benefited from the Fed’s decision.

Energy shares fared worst in the week, rising just 0.1 percent. As crude tumbled below $45 a barrel, the sector dropped 1.3 percent on Friday to all but erase its gains from earlier in the week.

With the economy now in focus, a Bloomberg gauge tracking the degree to which data miss or exceed economists’ estimates has been negative for all of September. Reports are due next week on durable-goods orders, services and personal spending in the world’s biggest economy.

“The market is reassured that the Fed didn’t do anything stupid and that gave a green light to risk takers,” said Jim McDonald, chief investment strategist at the Chicago-based Northern Trust Corp. “The Fed is off the table until December, so it’s going to be the economy and the election as equal focuses over the next couple of months.”

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