You might not have noticed, but stocks have been on a tear.
As I write this Friday morning, the Dow Jones Industrial Average and Nasdaq Composite index are on track for a seventh consecutive day of gains. That would mark the Dow’s longest winning streak since last October.
The Dow is up more than 900 points since May 2nd, the S&P 500 index has tacked on 100 points and the Nasdaq more than 300. Each has advanced nearly 4%.
That comes amid the best earnings season in years—one that up until now got no respect—and a ten-year Treasury note whose yield stubbornly refuses to stay above 3%.
The CBOE Volatility index (VIX) also has gradually worked its way down to just above 13, way below its panic peak of 37+ on February 5th. Will we soon see a single-digit VIX again?
So, what’s behind this apparent return to normal?
Well, as we all know, earnings drive share prices, and as I wrote in my MarketWatch column this week, earnings have been at least great, if not downright spectacular.
And it’s not just the effects of last year’s tax cut hitting corporate bottom lines; revenues have come in well above analysts’ expectations, which means business is booming.
With all that—and 3.9% unemployment for the first time since 2000—inflation remains tame, which is why ten-year yields haven’t gone as high as many expected.
Subdued inflation, even amidst strong earnings gains and decent but not over-the-top GDP growth, is why Jay Powell and the Federal Reserve can stay on the “gradual” path of three or four increase in the federal funds rate this year.
That economic strength and steady-as-she-goes Fed policy have helped fuel a mini-rally in the dollar over the past few weeks as well, another factor bolstering share prices as confidence in U.S. markets grows.
Finally, a series of conciliatory gestures by North Korean president Kim Jong-un—from the release of three American prisoners to vows to permanently shut a nuclear testing site—have raised hopes that President Trump will succeed where his predecessors have failed in crafting a lasting peace and disarmament agreement with North Korea. He and Kim will have a summit meeting in Singapore in June.
Who knows if that will succeed or if, as in the past, North Korea will simply lie and stall while secretly building its nuclear capacity. And maybe earnings are as good as they will get, and the economy won’t grow much faster, either.
Nothing lasts forever—neither bull nor bear markets, recessions nor recoveries—but let’s enjoy this return to normalcy while we can.