Stocks rallied for the 7th-consecutive week – helping the S&P 500 and Dow Jones Industrial Average hit new record highs. Over the past few months, we have seen a massive coordinated “offensive” from global central banks to help boost both Main St & Wall St. At the end of October, we saw the U.S. Federal Reserve end QE 3. Then almost instantly, we saw the Bank of Japan, The European Central Bank, and China’s Central Bank all step up and announce aggressive measures to join the easy money party. Easy money from global central banks has played a major role in sending stocks higher since the historic March 2009 bottom. The SPX soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. Stocks continue to rally even though QE 3 has ended. The reason is because the QE trade has evolved, like famous investor Mohamed El-Erian so eloquently stated at the end of October. The Fed may have ended QE 3 but they are still adopting an “easy money” stance. Additionally, other central banks around the globe, have joined the easy money party. That’s how the QE trade has “evolved.” Instead of just the Fed printing gobs of money everyday we now have the ECB, BOJ, and the People’s Bank of China all joining the easy money party. So the old Fed Put (the notion that the Fed will step in and save the day if Main St or Wall St weakened), has now shifted to the Central Bank Put and that is a huge bullish fundamental backdrop for stocks. To be clear, in the short-term the market is extended and way over due for a pullback of some sort to consolidate its recent (and very strong) rally.
Monday-Wed’s Action: Stocks Grind Higher
Stocks were quiet on Monday as crude oil bounced sharply (nearly 5%) from deeply oversold levels (fell 8.6% on the prior session). The big news came from the metals market- after gold and silver exhibited huge positive reversals and surged after the Swiss referendum to return all foreign-held gold to the country and force the Swiss National Bank (SNB) to hold 20% of its own currency (the Swiss Franc) in gold was overwhelmingly voted down. The final no vote was 77% no vs 23% yes. In The U.S., the national ISM manufacturing index fell less than expected to 58.7. Stocks rallied on Tuesday as energy stocks rebounded from egregiously oversold levels. October Construction Spending rose 1.1%, easily beating the 0.6% forecast. The research from Black Friday and Cyber Monday were mixed to mostly lower. The initial estimates showed sales from Black Friday were down 7-12% vs 2013 but Cyber Sales rose by 20%. Australia said Q3 GDP was weaker than expected, and revised Q2 GDP down. The concern was that weaker Australian GDP may bode poorly for Chinese growth given the close connection between the two economies.Stocks rose on Wednesday after the ADP said US employers added 208k jobs in November, missing estimates for 222k.
Thurs & Fri’s Action: Stocks Rally After Jobs Report
Stocks slid on Thursday after the European Central Bank and The Bank of England held their last meetings of the year. Both Central Banks held rates steady but the big news came after the ECB did not announce new policy measures to stimulate their lackluster economy. Market participants wanted the ECB to announce a new round of QE or other stimulative measures. The euro rallied hard on the news but then Bloomberg reported that the ECB was preparing to launch new stimulative measures in January 2015. Before Friday’s open, the labor department said U.S. employers added 321k new jobs as the unemployment rate held steady at 5.8%.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). Until this one weakens, it deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.