Stocks Push Higher as Reflation Trade Returns

U.S. equities finished higher on Thursday as the familiar “reflation” trade that drove the post-election rally — but has been frequently absent throughout March — made a return.

The Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.3% and the Russell 2000 gained 0.8%. Treasury bonds were weaker, the dollar strengthened (thanks to a hawkish Fed/dovish European Central Bank dynamic), gold lost 0.7% and oil rallied 1.7% on OPEC jawboning about an extension of last year’s production freeze agreement.

Financials led the way with a 1.2% gain as bank stocks benefited from a backup in long-term yields and a note from Goldman Sachs saying it is looking for better first-quarter results out of the industry group. Utilities were the laggards, down 0.7%.

ConocoPhillips (NYSE:COP) added 8.8% on a $17.7 billion asset sale with proceeds to be used to pay down debt and increase share repurchases by $3 billion. That garnered an upgrade from analysts at UBS. FedEx Corporation (NYSE:FDX) gained 1.7% on a upgrade by Susquehanna on valuation.

Lululemon Athletica inc. (NASDAQ:LULU) lost 23.4% as the yoga pants maker cut forward guidance well below expectations, looking for Q1 comp-store sales to decline in the mid-single digits vs. the 5%-plus growth Wall Street was estimating. Management cited slower ecommerce conversions on a weak spring product lineup and a drop in mall traffic.

Looking ahead, RBC’s cross asset strategist Charlie McElligott notes that the reflation trade, if it’s going to continue into April, will need to be supported by continuing strength in the dollar and crude oil.

For now, instead of spooking risk assets, the Fed’s newfound hawkishness (with even noted policy doves calling for upwards of four quarter-point hikes this year) is bolstering the reflation trade by lifting the dollar higher and attracting global capital into U.S. assets. Same with OPEC’s jawboning, keeping oil traders distracted from swollen inventories and ramping U.S. shale oil production.

The blitz higher — powered by technical “buy the dip” interest in stocks after the “Trumpcare” disappointment last week resulted in the worst one-day loss since October — should continue at least until the start of the Q1 earnings season with Bank of America Corp (NYSE:BAC) releasing results on April 18.

Eventually, the strong dollar and higher U.S. rates will fuel fears of financial tightening — both in terms of consumer credit costs as well as corporate debt funding. But not yet.

As a result, I have recommended a batch of new call option positions in possible large-cap turnaround plays such as Exxon Mobil Corporation (NYSE:XOM) to my Edge Pro subscribers.

Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers. Redeem by clicking the links above.

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