Is Goldilocks Back?

The market gods have stilled the troubled waters.

The Dow Jones closed higher for the seventh straight day today.

The index has surged some 1,300 points these past seven trading days.

The S&P and the Nasdaq have followed in step.

Wall Street’s “fear gauge,” VIX, has plunged below 13— its lowest reading since Feb. 1.

Ten-year Treasury yields, meantime, have stabilized under 3%.

“What we are getting here is a series of breakouts,” exults Art Cashin, UBS director of floor operations at the New York Stock Exchange.

Adds JPMorgan’s Shawn Quigg:

The S&P 500 is now above its 100-day moving average, which, if sustained, would be a psychological “win” for investors and could build further upside momentum for the U.S. markets.

All is peace… once again.

What has become of the recent market turbulence?

Has a white dove landed in the Middle East?

Have markets forgotten about a possible trade war?

Or perhaps markets have weighed the risks… and come to terms with them.

This is the apparent conclusion of Karyn Cavanaugh, senior market strategist at Voya Financial:

The bears need to hibernate for a while because it looks like most of the geopolitical news has been priced in…

Perhaps there is some justice in this view.

U.S. and Chinese trade officials made evident progress last week in Beijing.

And Washington will host fresh negotiations next week.

Meantime, the two Koreas bat eyes at one another… reducing fears of a military clash.

What about Iran?

Trump has announced plans to withdraw from the nuclear deal.

But markets appear to be taking the news in easy stride — for the time being at least.

Maybe last Friday’s unemployment report provided the tonic to brighten investor moods.

The Labor Department claimed unemployment dropped to 3.9%… its lowest point in 20 years.

Jim Giaquinto from Zacks reports:

It looks like the “goldilocks” jobs report last Friday may have gone a long way in helping the market to relax and take a breath.

Then we come to corporate earnings…

So far, 90% of S&P 500 companies have reported earnings.

Nearly 80% have exceeded expectations.

Thomson Reuters informs us 64% is the historical average.

Only 14% fell short of the expected glory.

And positive earnings enable stock buybacks.

S&P companies have purchased $158 billion of their own shares during the first quarter — a record pace.

And The Wall Street Journal informs us:

Of the 20 S&P 500 companies that spent the most on buybacks over the first quarter, nearly three-quarters have outperformed the index so far this year. The group has risen an average of 5.2% in 2018, compared with the S&P 500’s 1.9% gain, according to a Wall Street Journal analysis of S&P Dow Jones indexes data.

Apple, for example, announced a $100 billion buyback program last week.

Its stock surged 13% the week following… and notched a 52-week high yesterday.

Apple is the largest American company by market value. It therefore exerts an outsized influence on markets.

Maybe this partly explains the latest stock market rally.

Are stock buybacks a financial parlor trick?

Yes, mostly.

Do they reflect a corporation’s productivity?

No, they do not.

But they tend to lift the stock price — in the near run at least.

And shareholders are flighty birds.

They’ll wing off for greener opportunities if unsatisfied.

Let the long run be tomorrow’s worry.

So the question lingers in the air:

Is the past week’s stock rally the sun peeking temporarily through the gloom?

Or is the gloom scattering… and are blue skies returning?


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning