The Market ‘Really Loves Cheap Money’: Why Stocks Bounced Back

(Bloomberg) -- With the S&P 500 briefly peeking above its Tuesday close, it’s like yesterday never happened in the stock market. Bulls have recovered from their body blow, evidently making peace with Jerome Powell’s characterization of the Federal Reserve rate reduction as a "mid-cycle adjustment."

The S&P 500 surge 1% to rebound from a 1.1% rout on Wednesday in the biggest turnaround since May. Here’s five theories on what led to the bounce.

Confused, Not Disappointed

• Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“The Fed was confusing more than disappointing. Yesterday’s down day was an overreaction. The economy remains strong, the Fed is no longer tightening and may potentially ease further. We should be sideways to slightly up under those conditions and I think the natural bias of the market will be to continue to move higher in the absence of negative trade news or other negative shocks to the economy.”

Economy Still Strong

• Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

“The initial reaction yesterday was, ‘Oh, they’re not going to be cutting more,’ but today people are focusing on why they’re not going to be cutting more. That’s the focus today, that the economy is fine. We’re in a good spot here. They can wait and see how things develop on the trade front, the impact that has on the economy, and they’re not committed to cutting further and they can wait and see.”

Money’s Already Cheap

• Kim Forrest, chief investment officer at Bokeh Capital Management in Pittsburgh.

“The market really loves cheap money. It was a tantrum yesterday saying ‘Oh my gosh, I’m not going to have even lower low rates.’ I mean honestly, I don’t know what Mr. Market’s thinking? Even in the last 12 years, the fed rate was as high as 5% and now these companies that have lots of risk can refinance for like 30 years for less than that, way less. I think people were thinking this through saying ‘Hey, I got a pretty good deal on the interest rate scenario.’ And that’s why they’re back.”

Another Cut Still Possible

• Phil Orlando, chief equity market strategist and head of client portfolio management at Federated Investors.

“Investors took a step back and looked at a bigger picture. At Christmas last year, the Fed had three hikes in its dot plot - two this year, one next year. Where are we now? We’re still looking at at least one more cut, depending on how the economy transpires. The markets think that they know better and the economy is weaker than it seems and the Fed will still be forced to cut, let’s say, one more time in September this cycle. They think that Jay Powell raised interest rates for the last time in his career as the Fed chairman.”

Fed on Our Side

• Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, which has about $253 billion under management.

“People go home, sleep on it, come in today and look at earnings, and say ‘Well, the Fed is now on our side. It remains accommodative.’ You’ve got yields in the bond market continuing to fall and so it does make the TINA argument -- there is no alternative -- lower rates, lower discount rates, it increases the price of assets. You’re probably getting some of that, as well -- interest rates and the curve structure. So I think it’s a combination -- it’s earnings, and I think people are reevaluating what Powell said and what actions he may take going forward.”

--With assistance from Vildana Hajric.

To contact the reporters on this story: Elena Popina in New York at epopina@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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