The Nasdaq just entered a bull market as the Fed fuels tech stocks toward their second-best quarter in a decade

• The Nasdaq 100 entered a bull market on Wednesday, rallying more than 20% from its December low.
• The tech-heavy index also is on pace for its second-best quarter in a decade.
• The Nasdaq has gained 17% in the first three months of 2023, with a few days left in the first quarter.

On Wednesday, the Nasdaq 100 entered a technical bull market for the first time in almost three years, and tech stocks remain on track for their best quarter outside of the pandemic. 

Investors can thank the Federal Reserve for the stock boost, as policymakers have quickly expanded the central bank's balance sheet during March in response to the string of bank failures that started with Silicon Valley Bank. 

The bank crisis and elevated recession risks have also raised expectations that the Fed will start cutting rates later this year, helping lower bond yields and giving tech stocks a further lift.

Fueled by strong performances by mega-cap names like Apple and Microsoft, the tech-heavy index closed Wednesday's session more than 20% higher from its December 28 closing low. 

The last time the Nasdaq 100 entered a bull market was in April 2020, a quarter that also marked the best stretch in the last decade. Between April and June 2020, the Nasdaq soared more than 30% as the Fed and federal government poured on stimulus in response to the pandemic.

Meanwhile, the Nasdaq has gained 17% in the first three months of 2023, with a few days left in the first quarter.

Signs of financial stress historically have prompted investors to buy more stocks, according to a Thursday note from DataTrek Research. 

DataTrek highlighted that the St. Louis Fed Financial Stress index reading is currently in the same ballpark as it was in July and August of 2002, as well as October 2011 — two similar periods of financial stress.

"Adding stock exposure at such periods has always been profitable over a 3-5 holding horizon, even if the nearer term has sometimes been rocky (2001 – 2002, for example)," wrote DataTrek cofounder Nicholas Colas.

"This strategy works because financial stress always draws a fiscal and/or monetary response. That puts the current elevated reading into a useful perspective: buying stocks here assumes there will be a Fed policy response (lower rates) in the very near future."

Similarly, veteran investor Ed Yardeni forecasted that stocks could end this year 14% higher, because the recent turmoil will trigger a Fed pause.