Two weeks after markets freaked out, the worst appears to be over for now

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The gut-wrenching tug of war between rising rates and stocks seems to be taking a rest, and the worst of the February correction may be over for now.

Stocks closed out their fifth day of gains, with the S&P 500 now just 4.9 percent away from its all-time high. Its sudden and swift correction of just over 10 percent lasted all of nine trading days. The S&P gained 1.2 percent Thursday, closing at 2,731, about 9 points above the technically important 50-day moving average.

But strategists say they are more comfortable that the quick comeback of the market could be signaling a now more stable market — but a more volatile one.

"I think we've seen the low, but I don't know if we make a new high," said Bob Doll, chief equity strategist and senior portfolio manager at Nuveen Asset Management. "My year-end target since Jan. 1 is 2,800 ... I think we bounce around with reasonable volatility as we digest and absorb all the shocks that happened."

Bond yields were lower Thursday, but only after the 10-year Treasury yield hit a new four-year high of 2.94 percent. Just a few days earlier, that would have sent stocks swooning.

"I think the markets have understood maybe there's a new range of interest rates. It's not 2 to 2.5 percent. It's 2.5 to maybe 3.25, and markets have determined that's okay," said Jim Caron, fixed-income portfolio strategist at Morgan Stanley Investment Management. Last year's high in the 10-year was 2.63 percent, and it ended the year at 2.40 percent.

The stock market's wild sell-off started when interest rates moved up, after a surprise jump in wage inflation in the January employment report two weeks ago on Feb. 2. Consumer inflation this week was another shocker, but the stock market took that in stride and rallied hard even though Treasury yields gained.

"I think the low-rate, low-volatility environment is over. It doesn't mean rates can't go back down," said Caron. The Treasury market, as yields rise, is also adjusting for the first time in a long time to the view that the Fed may keep to its rate-hiking forecast of at least three hikes this year and more for next year.

Doll said the stock market will be able to deal with higher rates if the moves are not rapid. "We can creep higher. We can't gallop higher," Doll said. The issue is how much inflation starts to rise.

"I think we'll do a sideways chop for a bunch more weeks, maybe a few months," he said. Then the fundamentals come back to the fore: How far does inflation go? How far do rates go? How good are earnings?"

Doll said the market seems to have been boosted last week as companies began to buy back their stocks, post earnings announcements. On Thursday, Birinyi Associates said corporate buyback announcements so far this year are a record high of $170.8 billion.

"Last week, companies I talked to said we don't need new authorization. We have enough authorization. With earnings so good, cash flow so good, you give the tax cut from 35 to 21 percent, you allow them to repatriate, they're going to have a ton of money to do whatever they want in buybacks," Doll said.

He said that should help the market steady.

"That creates some sort of floor. I don't think stock buybacks necessarily push stocks up. When you have a fundamental problem, it's an underpinning," Doll said. "Since the bull market started in 2009, the only consistent buyer of common stocks has been corporate America, buying back their stocks."

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