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The US stock market in recent months: what goes down, comes up

Traders and financial professionals worked on the floor of the New York Stock Exchange on Wednesday.
Traders and financial professionals worked on the floor of the New York Stock Exchange on Wednesday.(Drew Angerer/Getty Images)

Investors are like Rocky Balboa: Every time they get knocked down, they dust themselves off and jump back into the stock market. Correction after correction, bear market after bear market, even when the crowd says “stay down.”

And that’s what investors did after a beating that left the Standard & Poor’s 500 index down nearly 20 percent from mid-September to Dec. 24. On Tuesday, just 81 trading days later, the benchmark for the biggest US stocks was back at a record high. Even though the market dipped slightly on Wednesday, most analysts see the rally continuing.

What happened after Christmas to get investors back in the ring? Investors and market watchers I spoke with Wednesday pointed to four key factors, led overwhelmingly by the Federal Reserve. The rundown:

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The Fed switches gears

On Dec. 19, central bank officials raised interest rates for the fourth time in 2018. It was their ninth increase since they began hiking rates in 2015, and they indicated they would make two additional moves higher in 2019. The reason: The Fed saw the economy growing quickly enough to require a tap on the monetary brakes to keep it from overheating.

But many investors believed the Fed was overreacting. Stocks had been falling for three months amid concerns about rising rates, China’s slowing economy, and the weakening outlook for corporate earnings. A few days later, President Trump tweeted: “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars.”

Whether it was pressure from the president — his tweet back in December was just the latest to criticize the Fed and Chairman Jerome Powell for tightening rates — or shifting economic signals, officials quickly changed their tune. In early January, Powell emphasized that there was no “pre-set” path for higher rates. Stocks started to climb.

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By the end of January, Fed officials had pivoted and signaled that they were done raising rates. They had gone from inflation hawks to doves, and investors didn’t look back.

“The market almost always likes a dovish Fed,” said Richard Mathes, president of Mathes Co., a New York investment adviser, using the term for a policy that doesn’t clamp down on interest rates to fight inflation. “The current situation, with the Fed being dovish while the economy continues to grow at manageable levels, is particularly good from the market’s viewpoint.”

China outlook brightens

The other big fear in the fall of 2018 was China. Its vaunted economy was cooling off, and the prospect of stiff new US tariffs did not bode well for a quick recovery.

But the two countries have been moving closer to a trade deal, and the government in Beijing has made sure banks opened up the lending spigot to pump more money into the domestic economy. The latest economic data from China have been encouraging: Industrial production and retail sales rose in March. Gross domestic product rose a better-than-expected 6.4 percent in the first quarter.

China, with the world’s second-largest economy, after the United States, is an important engine of international trade, not only here but throughout Asia and Europe.

“That argues that global growth, after slowing for a year, might be bottoming here,” said Jurrien Timmer, director of global macro at Fidelity Investments in Boston.

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Meanwhile, the other overseas worry, a Brexit-sparked European recession, has not materialized. A decision on Britain’s divorce from the European Union has been put off, and investors are notorious for focusing on the most immediate issues.

The US chugs along

The United States’ recovery from the 2008-2009 recession has been unexceptional — except for its duration and job-creating power. The US economy has been growing since the end of 2009, the second-longest expansion since World War II ended.

The 2.3 percent annual growth rate is modest compared to most modern expansions. But it’s been enough to create an average of 180,000 jobs a month this year and drive unemployment to 3.8 percent, near a 50-year low.

Economists are forecasting gross domestic product growth of 2.4 percent this year, which should be strong enough to keep adding jobs without sparking inflation.

Even if corporate profits start to shrink, the overall economy should expand, said Jennifer Ellison, a principal at B/O/S, an investment adviser in San Francisco. “We are more likely to have an earnings recession than an economic recession,” she said.

Concerns about profits wane

Speaking of the bottom line, we are in the thick of the first-quarter earnings season. Anticipation that profits would ebb some helped push stocks lower in the final months of 2018.

Analysts had been expecting per-share earnings to decline more than 4 percent for the January-March period, which would be the weakest performance since the third quarter of 2016. But the reality has been better than expected.

With about 20 percent of S&P 500 companies reporting, earnings per share have risen by 1.5 percent over the year-earlier quarter, said Matthew Miskin, a market strategist at John Hancock Investments in Boston. That’s meager, but far preferable to an outright decline.

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The estimates for the full year: a 3.7 percent increase in corporate profits, with most of that coming in the final quarter, compared to 20 percent in 2018, a huge increase that was largely inflated by the federal tax cut.

“We will take the strong results for now, but back-ending results can be a risky proposition,” Miskin said.

The bull market, which officially began on March 9, 2009, and almost died last December, will eventually run out of gas. There will be a lot of wailing and gnashing of teeth.

But the long-term history of the market shows that the smart investors don’t flee right after taking a hard hit.

Consider: $1,000 invested in the Vanguard 500 Index fund in January 1984 (a date I pick just because it’s when I entered the adult workforce) would be worth about $35,000 now. And that’s after three market crashes (1987, 1999-2000, 2008).

So invest like Warren Buffett: Pick good companies that you can hold onto for years. And when times get tough, be like Rocky and don’t give up.

Correction: An earlier version of this story misstated today’s value of $1,000 invested in the Vanguard 500 Index fund in 1984. It would be about $35,000.


You can reach me at larry.edelman@globe.com and follow me on Twitter @GlobeNewsEd. Sign up for my Talking Points AM newsletter here.

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