Bullish investors have emerged from their late 2018 hibernation. Cash is piling back into the riskiest corners of the market.
Fears of a recession induced by Federal Reserve rate hikes and US-China trade war have faded. They're morphed into hopes of a "soft landing" for the economy engineered by the suddenly-patient Fed and progress on trade talks. The CNN Business Fear & Greed Index went from "extreme fear" a month ago to "greed" today.
It's a fresh reminder of how quickly sentiment can shift on Wall Street, which suffered its worst December since the Great Depression.
"The market oversold tremendously in December," said David Kelly, chief global strategist at JPMorgan Funds. "The things that fell the most were the ones likely to the rise the most."
Hence the snap-back rally for crude oil, which crashed into a bear market last year. US oil prices are up 22% so far in 2019.
Ditto for GE (GE), which plunged 56% last year. GE is up 34% so far in 2019. It'd be the best stock in the Dow — if it hadn't been kicked out last summer. Other big 2018 losers like Zions Bank (ZBK), Coty (COTY) and General Mills (GIS) are all up double-digits this year.
The junk bond market ground to a halt in December. Exactly zero US high yield bonds getting issued for the first time since the financial crisis. Junk bond sales remain slow, but the market has stabilized. Junk bond ETFs, including the iShares iBoxx High Yield Corporate Bond ETF (HYG), have soared back to all-time highs.
Green light from the Fed
"Fear of a credit event" in December "caused Fed capitulation," Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, wrote to clients on Friday. "It worked."
The Fed's rapid reversal from hawkish to extremely dovish has served as a green light for investors. The risk trade is back on, at least for now.
"We've seen quite a dramatic shift in the Fed's outlook for monetary policy in just the past two months," said Kelly.
Suddenly, the Dow and S&P 500 are trading at eight-week highs. Both have reclaimed more than half their losses.
But some think Wall Street's euphoria over Fed policy is misplaced.
"People have to ask themselves: Why is the Fed pausing?" said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "It's not because they met their objectives. It's because the data and markets have scared them."
If the Fed's fears come to fruition, then a severe slowdown could be in the offing. That would be bad for stocks. If the Fed is being too cautious, then it may have to aggressively raise interest rates to catch up to inflation.
"Either scenario, I wonder how much more upside there is to equities," said Boockvar.
JPMorgan's Kelly isn't buying the recession talk. He pointed to the dovish Fed and little sign of bubbles in the economy.
"People aren't paying enough attention to the possibility that this expansion could continue for quite a few more years," he said.
2. The fate of Sears: This week could determine whether Sears survives. A US Bankruptcy Court judge will hold a hearing starting Monday about Sears' plan to sell its assets to its chairman, Eddie Lampert, who wants to keethe 133-year-old company in business.
The hearing will probably unfold over the week. Sears hopes to have a decision that approves the sale by Friday.
3. Media earnings: Both Disney (DIS) and 21st Century Fox (FOXA) report earnings this week. Disney is on track to complete its purchase of most of Fox before June, the company said in recent a government filing. Disney is also getting ready this year for the launch of its new streaming service, which it is expected to talk more about at an investor day in April.
Fox, meanwhile, is preparing for its own reinvention as a smaller, leaner media company. The New York Times (NYT) and News Corp (NWS), which owns the Wall Street Journal and other publications, also report results this week.
4. Google isn't slowing down: In the final three months of 2018, Google's CEO was grilled by Congress about data privacy, its employees around the world walked out over sexual harassment scandals, and it disclosed a security bug impacting the largely forgotten social network, Google Plus.
But that doesn't seem to be slowing down Google's business. Alphabet (GOOGL), Google's parent company, is expected to announce 20% year-over-year sales growth when it reports holiday quarter earnings results after the bell Monday, fueled by the continued strength of its advertising sales business.
5. General Motors reports earnings: General Motors will report financial results Wednesday. It's the company's first quarterly report since it announced plans to cut 8,000 salaried staff and close five plants in North America.
Analysts are forecasting lower earnings for the quarter and the year. But the cutbacks aren't a response to financial distress. Instead, GM says it wants to trim costs and free up funds so it can invest in electric and self-driving vehicles. Analysts will be looking for more details about its investment plans when results are released.
6. Coming this week:
Monday — Alphabet and Ryanair (RYAAY) report earnings; markets in mainland China are closed all week
Tuesday — The State of the Union address; Disney, 21st Century Fox, Snap (SNAP) and Electronic Arts (EA) report earnings
Wednesday — GM (GM), Chipotle (CMG), Toyota (TM), Humana (HUM), Eli Lilly (LLY), The New York Times and Spotify (SPOT) report earnings; the Cayman Alternative Investment Summit begins
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