It seems the bulls have, indeed, returned to the stock market. After a month of sideways trading punctuated by a couple of stomach-churning drops in mid-May, market sentiment turned somewhat bullish over the last week or so. Take a quick look at the S&P 500 Index over the past six months... From late November to April 16, the S&P 500 gained about 15%. From April 16 to May 19, the S&P 500 dropped almost 2%. As of this writing, the market has regained about 2%.
While it's impossible to predict the future of the markets or the economy - and this rally is just a few days old - the recent bullish trend may have some staying power. Why? Well, there are several main reasons, and they're related. Let's go through them briefly. The Federal Reserve Much of the market rally since the COVID-19 crash last year has been due to the Federal Reserve keeping the pedal to the metal. That is, the Fed has continued to inject monetary stimulus into the economy via low short-term and long-term interest rates. Yet as unexpectedly high inflation data trickled in over the last month or so, investors sensed that the Fed might be starting to worry about rising costs and prices and might react by hiking rates. In recent days, however, the Fed has made a concerted effort to quell those fears. Several Fed officials have made speeches this week emphasizing the central bank's view that any inflation spike will be very temporary - and won't require an adjustment to rates. Basically, it's all hands on deck to change the inflation narrative inside the Marriner S. Eccles Building. For example, on Tuesday, Chicago Fed President Charles Evans said that recent economic data "does not appear to be the precursor of a persistent movement to undesirably high levels of inflation." That's a bit of "Fed-speak" that means, essentially, "Don't worry, be happy about inflation... We're not thinking about raising rates." Bottom Line: Don't fight the Fed. Waning Inflation Fears Data released by the U.S. Bureau of Labor Statistics on April 13 created a new bogeyman for markets. It showed that inflation rose 2.6% year over year. That was right about when the market direction shifted from upward to sideways. Things got considerably worse on May 12 as the inflation data for April was released. It showed a stunning 4.2% increase in inflation since April 2020. The CBOE Volatility Index, which I like to think of as the market's blood pressure reading, spiked almost six points that day to 27.6. It has since fallen back to around 17. But if you really want to know the market outlook for inflation, don't watch stocks. Watch bond yields. Bond yields are a much better indicator of how markets feel about inflation. The 10-year Treasury yield spiked to 1.69% when that terrible inflation report came out on May 12. As of this writing, however, that yield has fallen back to about 1.56%. So it seems markets are coming around to the Fed's cheery message. Bottom Line: Watch bond yields, not stocks, for the best read on the inflation outlook. Beating Profit Estimates In late 2020, many company and market analysts predicted that a 2021 economic reopening - coupled with a lot of free or low-interest money swashing around the economy - would be a boon to corporate profits. Those predictions are coming true... in spades. As first quarter earnings season comes to an end, at least 87% of companies in the S&P 500 beat analysts' profit estimates. The Financial Times says, "In the U.S., where almost all of the S&P 500 companies have reported, this is shaping out to be the best quarter in at least a decade." As the vaccine rollout continues and the last of the lockdown measures are lifted, we could see even better earnings reports in the second and third quarters. And as Chief Investment Strategist Alexander Green always says, "Given a decent amount of time, share prices follow earnings." And that's not all Alex has in mind for the years ahead. He recently sat down with journalist Bill O'Reilly to talk about the upcoming economic boom. In fact, he says that the next two years will create more wealth than the last two decades combined. If you want to know more about the companies Alex expects to significantly outperform the market, just click here to watch his presentation. Bottom Line: Share prices follow earnings, and earnings are booming right now. Time to Buy Finally, after a month of market stagnation and a few ugly pullbacks, many investors probably judged that stocks were a bit "oversold" and decided to buy the dip. It's something we should all consider as this economic recovery proceeds. Enjoy your weekend, Matt | 
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