Market Outlook
Last Friday the major equity indexes notched a fifth
straight weekly advance after China's central bank cut its benchmark interest
rate and its euro zone peer announced asset purchases in efforts to boost each
region's economy. China and maybe Europe are taking over the lead in providing
"easy money" after The People's Bank of China said it was cutting
one-year benchmark lending rates for the first time in more than two years. The
move came after European Central Bank head Mario Draghi said "excessively
low" inflation had to be raised quickly by whatever means necessary,
rekindling expectations the ECB will move to stimulate the euro zone economy.
The ECB said it started buying asset-backed securities to encourage banks to
lend and revive the economy. "What it suggests is that these
central banks are prepared to do even more to stimulate growth, to stimulate
demand, and that always equates to better stock markets," said Quincy
Krosby, a market strategist at Prudential Financial.
Listen up, you can find 100 or 1,000 analysts who will
proffer conflicting opinions on why the market should’ve or shouldn’t have
performed as it has since the recession started. But I don’t care who you talk
to, no knowledgeable market watcher can seriously deny that worldwide central
banking authorities various forms of Quantitative Easing (QE) is the steroid
that has juiced stock markets to stratospheric levels. We can talk about and
debate innumerous theories on how to price stocks and what factors will
influence whether shares will go up or down. However, at its most basic core,
what drives the price of any investment is the straightforward, simple supply
and demand equation. If there are more buyers (demand) than there are sellers
(supply) the price has to go up and will continue to rise until there is
equilibrium with demand equaling supply. Conversely, if there is more supply
(sellers) than there are buyers (demand) the price will always drop until there
is equilibrium. You can do quantitative analysis and apply all the advanced
economic theory you want, but in the end it is the basic demand = supply
equation that will drive the price. The reason all the ‘expert’ financial
prognosticators keep getting it wrong about a market correction, crash, etc. is
because they ignore that fact central banks around the word have supplied
unlimited demand ‘QE’ to keep stock prices afloat. Company earnings, political
system dysfunction, global political and economic unrest, chronically poor
labor markets, etc., none of it have really mattered. A lot of folks will make
the claim that the strengthening economy is why the stock market is making
record highs, if that were really true there is no way the Democrats would have
gotten crushed in the election weeks ago if the economy was thriving the way
the Obama administration claims. "Central bank intervention is the No. 1
thing investors worldwide are looking at right now," said Mike Serio,
regional chief investment officer at Wells Fargo Private Bank.
Both the Dow and S&P ended at records. For last week,
the Dow rose 1 percent; the S&P added 1.2 percent and the Nasdaq rose 0.5
percent. It was the fifth straight weekly advance for all three. The latest
records extended a comeback in the S&P 500, which has increased 11 percent
since plunging in mid-October. A strong third-quarter earnings season, on top
of a recent string of positive U.S. economic data on housing, jobs and
manufacturing, have helped put investors in a buying mood.
Investor Analysis
All 10 sectors in the S&P 500 index rose last week with
materials stocks’ climbing the most, that sector is up 9 percent this year.
Energy stocks were among the big gainers, getting a boost from a rebound in oil
prices. Some traders anticipated that OPEC will decide to cut production at a
conference next week. Last
week we said “…The biggest change from
recent weeks is the plunge in the Utilities sector which had been leading the
market. This suggests that traders are looking to accept riskier assets at the
expense of dumping risk adverse assets like Utility stocks…” for a standard
strategy to construct an investment portfolio, the best technique to provide
diversity is to invest in top performing stocks from each of the leading
sectors. Selling shares in lagging sectors like Energy and Financials to invest
in leaders such Industrials and Technology is a smart move that offers a high
probability of success.
By Gregory Clay
Investment Strategist
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