After a brief 2.5 week consolidation, the benchmark S&P 500 (SPX) soared to new record highs last week after China’s Central Bank cut rates and joined the easy money party. It has been a very “interesting” few weeks on Wall Street. 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 the Fed 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.
Monday-Wed’s Action: Stocks Grind Higher
Stocks were quiet on Monday after news spread that Japan’s economy slid into a recession in Q3. As a quick refresher, a recession technically occurs when an economy contracts for two consecutive quarters. On an annualized basis, Japan’s economy fell -1.6% from the prior quarter. Even more worrisome was Q2’s lousy -7.3% decline. Clearly, the Bank of Japan (BOJ) knew something was very wrong when they announced aggressive measures to stimulate their lackluster economy a few weeks ago. In M&A news, Halliburton (HAL) made an aggressive bid to acquire Baker Hughes (BHI) for $34.6 billion.
Stocks rallied nicely on Tuesday, helping the benchmark S&P 500 jump out of a 2.5 week trading range and hit new record highs. Overnight, Japanese Prime Minister Shinzo Abe announced plans to dissolve the country’s Parliament and will hold surprise elections in December to make sure his policies are accepted by “the people.” For the past few years, PM Abe has embarked on a series of aggressive policies all designed to jump start Japan’s lackluster economy (a.k.a. Abenomics). Economic news in the U.S. was helpful- inflation remained at bay after the Producer Price Index was slightly higher than expected, but below the 2% level closely watched by the Fed. A separate report from the National Association of Realtors (NAHB) showed home-builder sentiment rose to 58 in November, up from October’s reading of 54.
Stocks closed relatively flat on Wednesday after the Fed released the minutes of their latest meeting. The minutes of the Fed echoed their recent stance and said they were concerned that the slow down in the global economy could adversely affect the U.S. economy. The reason why the market yawned at the minutes was because it was a foregone conclusion that the Fed is ready to act, if conditions deteriorate. That is the primary reason why stocks continue to grind higher.
Thurs & Fri’s Action: Stocks Trade Near Highs
Stocks rallied nicely on Thursday as investors digested several economic data points. Existing Home Sales In October beat estimates and rose to 5.26 million (est 5.15 million). The Philly Fed Index was 40.8 which easily beat the Street’s estimate for 18.5 and was the highest reading since December 1993! Inflation remains below the Fed’s 2% target when October CPI rose by +1.7%, edging past the average forecast for 1.6%. Finally, weekly jobless claims were 291k, slightly above the 284k forecast. Before Friday’s open, China’s Central Bank surprised investors when they slashed interest rates to help stimulate their economy. China’s central bank is the latest Central Bank to join the “Easy Money” party.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. We have also noted that the bull market is aging and may be in the process of forming a large topping pattern but that topping pattern was negated as stocks repaired a ton of technical damage in the latter half of October. 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.