Make it three in a row. The S&P 500 Index rose for the third day in a row for the first time since ahead of the Midterm elections. In fact, stocks haven’t closed in the red since Federal Reserve (Fed)Chairman Jerome Powell said the Fed would be ‘patient’ in regards to its interest rate policy. But just how rare has a three-day rally been? The only other times in history that stocks did this were July ’10, October ’02, right after the ’87 crash, and October ’82. All four instances came after extended weakness and marked fairly significant market lows before major rallies.
Fed minutes on deck. Minutes from the Fed’s December meeting will be released at 2 p.m. today. Investors will be looking for more context around officials’ unanimous decision to hike rates last month, even as policymakers shifted their rate projections down for 2019. However, a more hawkish tone in the minutes would likely be discounted given Powell’s more recent comments in which he said the Fed will be “patient” with monetary policy, fueling a reversal in the S&P 500 Index after it entered an intraday bear market last month. We expect the data-dependent Fed will continue to gradually hike rates, but be less aggressive than initially feared as policymakers juggle a strong domestic economy with global concerns.
Valuations supporting the rebound. Stocks have rebounded strongly-nearly 10% from late-December lows. We see further gains ahead given the fundamental foundation supporting economic growth and corporate profits, along with a Fed that appears more flexible than previously feared and improving prospects for a U.S.-China trade deal. Lower valuations are a primary reason for the bounce, which we believe have been pricing in an overly pessimistic economic and earnings outlook.