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Stocks power to best quarter since 1998 despite coronavirus cases

States halt reopenings as COVID-19 cases rise

Stocks closed higher on Tuesday, capping their strongest quarter since 1998 amid investor optimism that strong federal support will help nurse the U.S. economy back to health despite the surging coronavirus.

The S&P 500-stock index added 1.5%, or 47 points, bringing its gain since the end of March to 20%. The Dow Jones industrial index of 30 blue-chip stocks, which rose 0.8% on the day, or 285 points, has risen 14% over that period, while the tech-heavy Nasdaq composite has soard 37%.

Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, said the market is being supported by the likelihood that there won't be a nationwide shutdown again, the expectations of aggressive monetary policy by the Federal Reserve and hopes for a coronavirus vaccine sooner rather than later. "The path of least resistance is still two steps forward, one step back," Schutte said.

"Broadly speaking, the market is reacting to economic data that is better than expected," he added.

The stock market's strong run in recent weeks follows a devastating 20% "correction" earlier this year that marked its worst quarter since the 2008 financial crisis. But surprisingly strong job growth in May and a rebound in stalled consumer spending is stoking Wall Street hopes that the the recession triggered by the pandemic will be short-lived.

Fed, lawmakers to the rescue

Stocks built on gains made toward the tail end of the first quarter, when promises of massive amounts of aid from the Federal Reserve and Capitol Hill helped put a floor under the market. Low interest rates generally push investors toward stocks and away from the low payments made by bonds, and the Federal Reserve has pinned short-term interest rates at their record low of nearly zero.

Other green shoots, according to Wall Street economists: Retail spending in May surged a record 18% from its ultra-low April level; mortgage applications for new home purchases recently hit an 11-year high; and sentiment among homebuilders, which plunged in March and April, had its biggest ever jump in June. 

"It's a rally built upon stimulus and vaccine optimism," said David Lyon, global investment specialist at J.P. Morgan Private Bank.

Another factor that's helped keep markets climbing overall is a sense among traders that even as some states pause reopening or order some businesses shut down again in response to rising new confirmed COVID-19 cases, the economy is on the mend.

"It's a recognition that the worst of the economic impact is behind us," Lyon said. "The question is just the pace of the reopening and the return of normalcy. Even though it's probably going to be slower, it's still in a positive trajectory."

Less clear is how long the party will continue. A rise in coronavirus infections since numerous states lifted restrictions on businesses in May now has some local governments pausing their reopening. The surge in confirmed new cases, which has prompted the European Union to bar U.S. travelers from entry, is seeding doubts that the economic recovery can happen as quickly as markets had forecast. 

Beyond the coronavirus, analysts also point to the upcoming U.S. elections and other risks that could upset markets. If Democrats sweep Capitol Hill and the White House, which many investors see as at least possible, it could mean higher tax rates, which could weaken corporate profits.

"While the economy appears poised to recover, the timing is unclear, and the path is likely to be full of twists and turns" analysts with the Wells Fargo Investment Institute said in a note to investors. "We believe voter perception of how President Trump manages the reopening remains key to his reelection bid."

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