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Here's why the stock market has its swagger back—for now


Don’t look now, but U.S. stocks are in a decided uptrend as a period of market anxieties appear to have faded—at least for the moment.

In its wake is a rally has ensued, with the Dow Jones Industrial Average

DJIA, +0.80%

on Thursday matching its longest win streak—six straight days—since a similar stretch ended Feb. 16, according to FactSet data. In fact, if the blue-chip benchmark musters a seventh consecutive romp in the green on Friday, it will equal its longest string of advances since Oct. 5.

Meanwhile, the technology-rich Nasdaq Composite Index

COMP, +0.89%

is poised to mark its lengthiest period of victories since a seven-session stretch ended March 12.

And the small-cap focused Russell 2000 index

RUT, +0.48%

is within a hair’s breadth of setting its first record since Jan. 23, when it closed at 1,610.706, outperforming both the Dow and the large-cap oriented S&P 500 index

SPX, +0.94%

with investors deeming the segment of smaller companies more insulated to some of the consternations that have plagued Wall Street since February.

It is all impressive stuff, but it is unclear this run is sustainable. Meanwhile, there are a number of factors that investors say are underpinning the recent resurgence in risk-taking that’s lifted the market.

Muted inflation

Inflation was the culprit for roiling the market back in February, as fears that a pickup would force Jerome Powell’s Federal Reserve to dial rates up faster than hoped for in 2018—a worrisome turn for stock investors compelled to revalue corporate cash flows and equity valuations at higher rates. Percolating inflation also is a pain point for bond prices, which move inversely to yields—a factor that can also amplify already tightening financial conditions for U.S. corporations.

However, Karyn Cavanaugh, senior market strategist at Voya Financial, said some of those worries have dissipated. For one, Thursday’s reading on consumer prices for April, came in at 0.1%, slightly below average estimates from economists surveyed by MarketWatch.

Moreover, the 10-year Treasury yield, an debt instrument used to price everything from car loans to mortgages, has held below the round-number level at 3%, which also had worried investors back in late April.

Solid first quarter earnings

Earnings have widely been considered among the best in recent memory but had been mostly ignored by market participants, until now. Instead investors have fretted that the recent batch of first-quarter results may be as good as it gets for earnings.

Check out: First-quarter earnings season was great—except for this small thing

Read:The stock market is punishing companies that beat earnings forecasts—here’s what history says

So far, 90% of the S&P 500 companies have reported, with 78.7% delivering earnings-per-share results that have come in better-than-expected, according to Thomson Reuters I/B/E/S data. On average, 64% of companies outperform relative to estimates, based on data going back to 1994. What’s more, only 14% of companies reported results in first quarter of this year have underperformed thus far, versus a historic norm of about 21%, Thomson Reuters notes.

Those results come even as Wall Street analysts raised estimates to account for an expected bump for companies following the late-2017 passage of corporate tax cuts by President Donald Trump.

Cavanaugh makes the case that earnings haven’t peaked and that second-quarter results may yet be equally good.

“In fact, in absolute terms, the second quarter dollar amount is actually higher than Q1 and estimates for Q2 growth have moved up to 19% and are likely to go higher,” she wrote in a Thursday afternoon research note.

Oil’s surge

U.S. benchmark crude-oil

CLM8, +0.37%

 has soared steadily to its highest level since November of 2014, breaking above a level at $71 a barrel. Although a rapid burst up in crude could have knock-on effects for average consumers, driving inflation and prices higher, at the moment, they are helping to deliver a jolt to an energy sector that was all but forgotten last year, producing the worst performance among the S&P 500’s 11 main sectors.

See: Why the unloved energy sector is primed for success

Read:U.S. gasoline prices could top $3 this summer thanks to Iran and Venezuela

Part of that rise is Trump’s decision to take the U.S. out of the multilateral Iran nuclear pact, threatening to disrupt the oil supply chain. Another factor is a raft of production curbs instituted across the globe and led by the Organization of the Petroleum Exporting Countries. The combination of those events may have a lasting effect on oil prices and values for some of the biggest energy companies. That is highlighted by a popular exchange-traded Energy Select Sector SPDR ETF

XLE, +0.75%

which tracks some of the biggest energy names and is up 3.8% so far this week, marking its best weekly gain since April 13.

Tech-sector renaissance

Don’t call it a comeback? Technology and internet stocks have shifted into higher gear, providing a key leg for equity benchmarks because those companies, including Apple Inc.

AAPL, +1.43%

and Facebook Inc.

FB, +1.57%

to name a few, tend to carry the biggest weight, and therefore have the most influence on the broad-market benchmarks.

They have started to recover, with Apple ringing up records in the past few sessions and Facebook returning to its trading level before its Cambridge Analytica scandal.

As MarketWatch’s Ryan Vlastelica writes, tech and internet stocks have regained their crown.

Volatility downtrend

One measure of volatility, the Cboe Volatility Index

VIX, -1.42%

is on track for its lowest close since Jan. 26, meaning it has completely erased the massive spike it saw in early February. Because the VIX, aka Wall Street’s ‘fear gauge’, reflects S&P 500 bullish and bearish options bets in the coming 30 days, and slumps as stocks rise, it is often used as a litmus test for the degree of implied volatility.

In other words, the trend lower, with the VIX touching a level beneath 13 for the first time since January, and under its historic average at about 19.5, suggests that there are fewer wagers for further declines in the market. Perhaps, that is because there is more optimism brewing in the financial system.

Trade wars and tariffs

Worries about a trade conflict between the U.S. and China have subsided somewhat. Fears that the two largest economies could engage in a full-blown trade war have rattled investors’ nerves because it is a scenario that Wall Street investors find unpredictable at best, and at worst one that could do damage to the global economy. On Thursday, reports suggested that some optimism was forming around the notion that Beijing and Washington could resolve their differences.

Read: U.S.-China trade spat could produce unexpected winner: Latin America

Long-term outlook

To be sure, this recent run-up doesn’t mean that the stock market can sustain this break higher and it is hardly time to crack open the Champagne.

But at least things look good in the short term. “The bears need to hibernate for a while because it looks like most of the geopolitical news has been priced in as well. One possible piece of negative news — The Wall Street Journal reported today that beer sales are down. Oh no.,” wrote Cavanaugh.

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