After a tumultuous start to the year, the U.S. stock market finally turned green. It’s a striking revival for an index that had entered correction territory by mid February, with investors’ sentiments turning bearish.
Rise in oil prices from record lows and Fed Chair Janet Yellen’s dovish comments lifted the markets. However, the oil market is still fundamentally bleak as the massive supply glut continues to persist, which may eventually drag the markets down.
Yellen said that downside risks of a fall in oil prices along with weak Chinese economy continue to linger, compelling the Fed to tone down its rate hike expectations. Weak manufacturing and service sector data along with subdued consumer spending bolsters expectations that the Fed will refrain from raising rates in the coming months. There is another looming fear factor. Corporate earnings have turned negative for the first half of the year.
Since there is underlying weakness in the economy, it will be prudent to play safe by investing in dividend paying stocks. Moreover, the likelihood of rates not going up as fast as the markets once assumed has made dividend paying stocks more appealing.
Oil Climbs, Fundamentals Remain Weak
Crude oil had dropped below $27 a barrel in mid-February. But, since then, oil prices gained more than 40% ahead of the Apr 17 meeting in Doha where the Organization of the Petroleum Exporting Countries (OPEC) and Russia will discuss an output freeze aimed at boosting prices.
However, the question is whether this upswing will last. Investors continue to remain skittish as the global inventory level swells. Demand for oil, on the other hand, continues to lag in an already oversupplied market. In fact, a survey yesterday showed that output from the OPEC increased in March to 32.47 million barrels a day. Given this scenario, the meeting is not likely to do much to bolster prices.
Fed Knows How to Calm Markets
Fed Chair Janet Yellen reassured investors on Tuesday that she expects rate hikes to be gradual in the future, which mostly helped defensive stocks like utilities to soar in the last couple of days. Yellen’s statement has also made it certain that the Fed won’t hike rates in April. The Fed had kept rates unchanged in March.
