Despite signs of weakness in early April when the major averages in the markets slid to lows that resembled their previous downturn, the stock market rallied and the bull run continued. Traders saw heavy selling as the market headed down, only to see a significant rebound mid-month. April started ominously with revelations that some frequent stock traders, through the alchemy of sophisticated technology and early access to market data, were beating big stock orders to the post and making serious money. This type of front-running through speed trading was headlined in most major business media. “Flash Boys,” the book that brought computer-generated high-frequency trading out of the shadows, recently zipped up the charts to become a No. 1 bestseller. However, as we moved toward Easter weekend, investor sentiment once again turned positive, and market indexes rose accordingly. The NASDAQ composite index rose 2.4 percent – a significant boost following some harrowing weeks for technology stocks.
What has lifted investors’ moods? As frequently happens, the Federal Reserve played a role. Chairman Janet Yellen made several announcements that soothed traders’ furrowed brows, and positive economic data in the period provided further grounds for optimism. Here’s a summary of the major factors.
- Fed Chairman Janet Yellen announced that the Fed had conducted its annual stress test of 30 major financial institutions and that the results were good. The Fed’s test is designed to evaluate how readily banks would manage a major financial crisis. The components of the test include a simulated set of circumstances involving a recession with the stock market in free fall, unemployment rising, and major declines in house prices.
- Yellen also addressed the Economic Club of New York and made it clear that the Fed would continue to work to keep interest rates low as long as needed to keep the recovery moving forward. It also appears that the Fed believes the recent uninspiring economic data can be attributed in part to the especially severe winter weather.
- First quarter earnings have been announced and companies reported better numbers than analysts expected.
- Economic data for February showed that retail sales were up 1.1 percent – the best monthly gain since late 2012. Economists expect that tax refunds will encourage consumers to increase spending.
- On the down side, the political crisis in Ukraine and worries about China’s economic growth make investment in major global markets unappealing. Although some economists see signs of renewed vigor in the European markets, the continuing debt problem in southern European nations troubles others.
- Bad publicity generated by revelations about high-frequency speed trading has made some individual investors anxious. Based on their research, the American Association of Individual Investors believes the percentage of bullish investors is now only 27.2 percent, a hefty decline from the 55 percent reported at the year-end in 2013.
Time will tell what spring will bring: Continued bullishness or a return to bearish sentiments. As always, the observations above are general in nature and no substitute for professional advice from tax and investment advisors.