Stocks Just Hit a Record. Thank the Fed.

The bull market lives, thanks to the Federal Reserve’s new, more relaxed approach to interest rates.

April 23, 2019

The economy is softening, profit growth is slowing, and a trade war between the United States and China is grinding on.

Stock investors don’t mind.

The S&P 500 rose to a record on Tuesday, surpassing a high last set in September. The day’s gains topped off a rally that has pushed the stock benchmark up 17 percent this year.

That’s the index’s best start to a year since 1987, and one that has confounded those who anticipated that 2019 would be a difficult time for stocks. After all, fear of slowing growth and deteriorating corporate fundamentals — the very same factors that investors are brushing off today — helped trigger a stock market meltdown in December.

There is a clear reason for this change in tune. The rally began after the Federal Reserve all but promised investors that it wouldn’t raise interest rates further and risk tipping the economy into a recession. Such “easy” monetary policy, to use the jargon of the markets, provides a helping hand to the economy and caps returns on bonds, the main investment alternative to stocks.

Both help buoy stock prices.

“All you’ve needed to know as an investor this year was whether monetary policy was going to be easy or not,” said Michael Arone, chief investment strategist for State Street Global Advisors. “It really has been a major support for the market.”

That support has touched almost every corner of the market. Speculative small caps, economically sensitive cyclical stocks, time-tested industrials, towering tech giants have all gained. The technology-focused Nasdaq index also rose to a record on Tuesday.

Some of this gain is a rebound from December’s 9 percent slide in the S&P 500. It has also helped that the earnings slowdown isn’t coming as a surprise.

Growth in corporate profits was widely expected to ease, after earnings jumped more 22 percent in 2018 largely because of sharp cuts in corporate tax rates. Those lower rates remain in place and are no longer driving year-over-year growth.

“It wasn’t sustainable,” Mr. Arone said of last year’s profit growth. Wall Street analysts now expect that full-year earnings will be up roughly 4 percent from last year.

Of course, with the global economy slowing, companies might have a harder time clearing the lower earnings hurdles they now face. Economists expect the pace of growth in the United States to slow to 2.4 percent this year, down from nearly 3 percent in 2018.

America’s peppy growth rate last year also was fueled by the tax cuts, as well as a boost in federal spending. While the economy remains healthy, the benefits of both are fading.

At the same time, the global economy is also losing steam, thanks in part to the continuing trade fight between the United States and China. On April 9, the International Monetary Fund cut its growth forecast for the third time since October, citing the tensions between the world’s two largest economies.

But investors have become more sanguine about the trade fight, with many seeing the lack of fresh tit-for-tat tariffs as an indication that the two countries will eventually come to some sort of an agreement.

“It does feel that both the U.S. and China want to post a win here,” said Kate Moore, chief equity strategist for BlackRock.

While this year’s softer economic conditions are filtering into lower expectations for corporate profits, they’re also reinforcing expectations that the Federal Reserve will refrain from increasing interest rates for the foreseeable future.

Analysts doubt that the current “easy” money policies alone will be enough to keep stocks moving higher. Even if the earnings picture improves significantly, a cooling-off period is overdue.

“It’s hard to see the market extending too much from where we are,” said Roger Aliaga-Díaz, chief economist at Vanguard. “From a fundamental perspective, it’s difficult to justify.”

After all, if the S&P 500 kept rising at the rate it did during the first quarter, it would be up more than 50 percent this year. That would make 2019 the best year in modern stock market history, just ahead of 1954’s 45 percent gain.

So it should come as no surprise that the pace of gains is starting to slow, and the recent tepid returns could be a preview of what investors should expect for the rest of the year, said Lori Calvasina, head of United States equity strategy at RBC Capital Markets.

“I think we’ve made the easy money,” she said.