Earnings, algorithms no match for Yellen as stocks jump

Bloomberg

The Federal Reserve may not be the only thing obsessing U.S. investors these days. But going by the rally that followed Janet Yellen’s decision to hold interest rates steady, it’s the biggest thing.
Throwing off concerns ranging from falling earnings to the machinations of automated traders, the S&P 500 Index surged 1.2 percent last week, the biggest gain in more than two months. Even after a drop on Friday, the benchmark gauge for American equity ended less than 1 percent from its level before rate paranoia spurred the biggest selloff since Brexit on Sept. 9.
The Nasdaq Composite Index rose 1.2 percent and closed at a record on Thursday. Boosted by the Federal Reserve’s inaction, dividend payers and companies benefiting from a weaker dollar led the week’s gains. The S&P 500’s newest group, real estate, surged more than 4 percent, its best performance since July.
For analysts trying to gauge the market’s most proximate threat, this week’s rally was evidence that investors can live with the declining earnings and soaring valuations as long as Yellen’s Fed is at heel. The market showed few signs of being roiled by the robotic selling among automated funds and risk-parity managers, a concern hypothesized by everyone from Bank of America Corp. to JPMorgan Chase & Co. in the wake of the Sept. 9 rout.
At the same time, getting out from under the valuation cloud gets harder every time the market goes up. It raises the pressure on companies to hit analysts’ forecast for 13 percent profit growth in 2017, an increase that has rarely been seen in the past two decades. Possibly reflecting that, about $2.2 billion was pulled from an exchange-traded fund tracking the S&P 500 this week.
“It seems like the central banks have things under control, they’ve really pushed out the volatility for the moment,” said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets. “As long as the Fed can keep things steady, like they are today, we’re going to have continued moves in a positive way in both equities and bonds because they’re basically saying there’s nothing else in the world to invest in.”
The Fed opted to wait for further evidence of stronger inflation before raising rates, even as the economy showed signs of improving. It also scaled back the number of increases it expects in 2017. That decision assuaged fears of resurfacing volatility, at least for now.
The CBOE Volatility Index, a measure of market volatility, fell 20 percent, it’s most since July 1.