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Momentum Indicators Help Preserve Stock-Market Rally

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Momentum Indicators Help Preserve Stock-Market Rally

Indicators of market momentum are coalescing with improving economic data to support the recent stock-market rally, creating a promising backdrop that some investors expect to help major indexes rebound from last week’s declines.

Concerns about an outbreak of the new coronavirus in China sent the S&P 500 down nearly 1% Friday. But recent actions by central banks around the world to stabilize growth with lower borrowing costs and an initial U.S.-China trade accord are driving a steady advance that has been hard to bet against.

The percentage of stocks in the S&P that are trading above a closely watched long-term trend line recently neared a peak from two years ago, as did the number hitting their highest level in the past year.

McDonald’s hopes to post earnings this week that make investors happy.


Photo:

Cole Burston/Bloomberg News

After stocks surged last year despite stagnant earnings, investors this week will be monitoring another batch of fourth-quarter results and projections. Apple Inc., which neared a $1.4 trillion market cap last week and has helped power major indexes higher, releases its results Tuesday. Fast-food giant

McDonald’s Corp.,

telecom firm

AT&T Inc.

and heavy-machinery maker

Caterpillar Inc.

are also on deck.

Although shares of companies sensitive to travel fell sharply last week, other stocks across sectors extended 2020 gains, particularly following upbeat earnings reports. The group of big gainers included chip maker

Intel Corp.,

credit-card firm

American Express Co.

and home builder

Lennar

Corp.

Also contributing to the positive mood: steady flows into passive funds tracking stocks.

“It’s just pointless to go against momentum,” said Didier Anthamatten, a senior portfolio manager at asset manager Unigestion, which holds a larger position in stocks than the benchmark it tracks. “I just want to go with it as long as the flow is there.”

Still, “a small noise could start an avalanche” if there is a swift unwind of bullish wagers, Mr. Anthamatten said.

One such trigger he cited was the deadly coronavirus that is disrupting travel and threatening economic growth in Asia. The S&P 500 ended the week 1% below its Jan. 17 record. It is still up 9.5% in the past three months and has set 26 records since the start of November with worries about a slowdown in global growth fading.

“The highly most likely outcome is we have a relatively benign economic environment in 2020,”

Goldman Sachs

Group Inc. CEO

David Solomon

said on the company’s latest earnings call.

Goldman shares are up nearly 5.2% so far in January, catching up to many peers and the broader market over the past 12 months. The stock had been under pressure over the company’s role in a Malaysian corruption scandal involving the government fund known as 1MDB.

Although most sectors have rallied to start the year, safer assets such as bonds and gold have also, a sign of investor caution.

“We’ve had this level of skepticism that’s still there,” said Steven Violin, a portfolio manager at F.L.Putnam Investment Management. “That’s a powerful reason to stay the course to some extent.”

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Analysts on Thursday will be parsing fourth-quarter U.S. economic growth figures and expect the slow but sturdy expansion to continue chugging along this year. As overseas economic data improve, many are hopeful corporate profits will rebound as well. Citigroup Economic Surprise Indexes for the U.S., eurozone and emerging markets have risen in tandem lately. All three gauges are now positive, indicating that economic figures are generally coming in better than expected.

And last week, the International Monetary Fund predicted that global gross domestic product will expand by 3.3% this year, up from the 2.9% pace in 2019 that marked the slowest growth in a decade.

Economists are waiting to see when the Federal Reserve might adjust interest rates next after three cuts last year. The central bank’s first statement of the year is due on Wednesday, and its careful statements about when it might raise them again and purchases of Treasurys to ease strains in money markets have supported stocks.

“Global monetary policy just keeps driving the market,” said Nancy Perez, senior portfolio manager at Boston Private, which has maintained investments in stocks in line with the benchmark it tracks. “I think they’re going to err on the side of caution.”

One catalyst that could upend the recent period of calm is political uncertainty ahead of the presidential election. But for now, many say it is too early to forecast how the outlook for growth might shift.

“This year is different…We’re going to see more tendency for the markets to wait and see,” said Nela Richardson, an investment strategist at Edward Jones. “A lot of that is attributable to the election.”

In 2018 and 2019 during the U.S.-China trade war, investors and policy makers embraced global manufacturing PMIs as a leading barometer of economic health. WSJ explains how purchasing managers can offer an early look at the direction of the economy.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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