‘Healthy markets take the stairs:’ the downside of the Dow’s 500 point Fed surge

Scott Gamm
·Reporter
Updated

The Dow’s (^DJI) 500 point surge Tuesday after Federal Reserve Chair Jerome Powell threw markets yet another bone, may be a sign of unhealthy markets.

That’s the assessment from Nick Colas, co-founder of DataTrek Research.

“Healthy markets take the stairs,” Colas wrote in a note to clients. “Healthy, happy markets don’t surge 2% in a single session. Worried markets do. Remember the old traders’ saying – stocks take the stairs up but the elevator down. Even if you take the stairs two at a time you don’t get a 2% day.”

The move in stocks helped to wipe away the market’s recent losses from two other big worries: President Trump’s plans to impose tariffs on imports from Mexico and fresh fears of tech regulation against the market’s hottest companies, includingFacebook (FB), Alphabet (GOOGL) and Apple (AAPL).

For Danielle DiMartino Booth, CEO of Quill Intelligence, the market reaction was binary heading into Powell’s Tuesday speech.

“Markets were poised to do one of two things — throw a fit or stage a monster rally,” she told Yahoo Finance.

The market rallied after Powell said that the Fed will “act as appropriate to sustain the expansion,” something many market participants interpreted as a sign that the Fed was open to cutting interest rates.

“Call it Powell’s Mario Draghi ‘whatever it takes’ moment,” Booth added, referring to the European Central Bank President’s now famous speech from 2012 in which he vowed to “preserve the euro.”

While the markets were pleased Tuesday, the broader stock market picture depends on earnings, according to Colas.

“This issue is the critical one for U.S. stocks over the remainder of the year,” he wrote. “No management team can survive very long if they increase costs faster than earnings.”

Earnings growth for S&P 500 companies is expected to rise 3.2% year-over-year for 2019, according to FactSet.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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