Big Tech stocks are driving stock-market gains this year
This year’s stock market rally has been “very narrow” and may not be sustainable, according to Seema Shah, chief global strategist at Principal Asset Management.
U.S. stocks rose sharply Thursday, bringing the S&P 500 index’s gains this year to 7.7% despite a slowing economy, according to FactSet data. The U.S. economy expanded at a soft 1.1% annual pace in the first quarter, slower than Wall Street analysts’ forecast for 2% growth in gross domestic product.
On March 4, 2020, the stock market rally clashed with expectations of a Fed pivot. The puzzling downward action of stocks contradicting the Federal Reserve’s efforts to buoy the economy sparked discussions about the “disconnect” between stock market sentiment and monetary policy.
The Dow closed on March 4 down more than 2000 points, following similar losses in other world markets, such as the FTSE 100, the Germany DAX and Japan’s Nikkei. The S&P 500 and Nasdaq were likewise hit hard, with both indexes suffering from a 5.1 percent loss.
The decline in the market followed the Federal Reserve’s recent steps to cushion the blow of the novel Coronavirus disruption to the economy, with a back-to-back rate cuts, promises of financial stability and additional easing measures as necessary.
But a bottom line disconnect remains between what the market happens to think and what the Fed communicates. As many analysts have noted, the market fails to recognize that the Fed’s policies are helping it to rise.
Investors expect the Fed to prop up the market by cutting rates, liquidating rate increases from last year and proposing additional easing measures. However, some believe the Fed’s eagerness to help financial markets could actually be viewed as a sign of weakness.
While the market is likely to rebound from its March 4 losses, the underlying divide between the expectations of investors and the Fed has been made evident. It remains to be seen how this disconnect will shape the market in the coming weeks and months.
In the meantime, the Fed will continue its efforts to support the economy and financial markets through whatever means necessary.