(Bloomberg) — With the Federal Reserve out of the way and the China Evergrande Group debacle seemingly contained for now, stock investors are piling back into risk assets.
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The S&P 500 turned higher for the week, overcoming the worst single-day selloff since May, while the Dow Jones Industrial Average is on pace to halt a streak of weekly losses. The Fed’s signal that a slowdown in its bond-buying is imminent came with commentary that the recovery remains robust. That’s borne out in some recent data points, with Citigroup’s U.S. economic surprise index turning higher — meaning activity readings are outpacing expectations once again.
“Just because the Fed’s going into a tightening cycle, it doesn’t mean that’s bad for equity investors,” Chris Gaffney, president of world markets at TIAA Bank, said by phone. “If it’s because they’re tightening because the economy is doing well, and they stay ahead of the curve, that’s a good thing.”
That perception has been enough for many investors to look past still-looming threats of peak growth, a potential showdown over the debt ceiling and other policy uncertainties. Though there are plenty of worries to contend with, many strategists see further upside for stocks through year-end.
JPMorgan Chase & Co.’s Marko Kolanovic, for one, argues the global economic recovery is poised to pick up momentum. Nicholas Colas, co-founder of DataTrek Research, said this week that continuing support from the Fed, relatively low forecasts for corporate earnings that may provide upside surprises and the strength of large-cap stocks could pave the way for the S&P 500 to stage a fourth-quarter bounce-back.
Fed Chair Jerome Powell said Wednesday the U.S. central bank could begin scaling back asset purchases in November and complete the process by mid-2022. Officials also revealed a growing inclination to raise interest rates next year.
Gaffney says the central bank had telegraphed its moves so well that few were caught off-guard by their intentions.
“Everyone just looking at the economic data knew that the dots were probably going to move a little closer in. So it shouldn’t have taken anybody by surprise,” he said.
The S&P 500 was up 1.6% as of 1:54 p.m. in New York, while the Russell 2000 index of smaller firms jumped 2.1%. Meanwhile, the tech-heavy Nasdaq 100 advanced 1.2%.
For Jim Paulsen, chief investment strategist at the Leuthold Group, technical reasons, worsening Covid-19 trends and a historically choppy trading season are among the factors that could put pressure on stocks. But, there are reasons for optimism, he noted.
“Under the surface of all this contemporary turbulence is an increasingly solid undertow of stock-market support,” Paulsen wrote in a report published Thursday. “Maybe it won’t be enough to ward off the pressures, but a foundation does seem to be forming in favor of another leg up for this bull market.”
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