U.S. stocks jumped Friday, along with global equities, following the Bank of Japan’s surprise announcement of a stimulus plan. The result was a month-end rally that sent the Nasdaq up 1.4% to a monthly gain of 3.1%.
The Bank of Japan’s stimulus move should drive the country’s bond yields down and bond and stock prices up. On Friday, the Nikkei 225 rose 4.8% to a seven-year high.
Analysts think U.S. interest rates may be increased sooner than expected. Inflation at just 1.4% in September is well below the Federal Reserve’s target of 2%.
Energy stocks rallied as a result of better-than expected earnings from Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM), both up 2.4%. Nevertheless, the Energy Select Sector SPDR ETF (XLE) ended the month with a decline of 3.5%.
Profit taking skimmed some of the froth from the biotech sector. The iShares Nasdaq Biotechnology Index ETF (IBB) was up on the opening but settled slightly lower at the closing bell.
Personal income increased by 0.2% in September after rising 0.5% in August, but the consensus was for a 0.3% increase. Personal spending fell 0.2% in September after increasing 0.5% in August, versus an expected increase of 0.1%. Both wages and salaries increased in Q3.
The final reading for the Thomson Reuters/University of Michigan consumer sentiment report for October increased slightly to 86.9, the highest level since July 2007.
At Friday’s close, the Dow Jones Industrial Average rose 195 points to 17,391, the S&P 500 gained 23 points at 2,018, the Nasdaq was up 65 points at 4,631, and the Russell 2000 rose 18 points to 1,174.
The NYSE’s primary market traded over 1 billion shares with total volume of 4.2 billion. The Nasdaq crossed 2.3 billion shares. On the Big Board, advancers outpaced decliners by 3.3-to-1, and on the Nasdaq, advancers were ahead by 2.3-to-1.
The advantages of holding stocks as a long-term investment are clearly shown by our chart of the S&P 500’s 17-month moving average. The last sell signal occurred in August 2011 at about 1,218, followed by a buy signal in October 2011 near 1,220. Since then, the index has advanced over 65%, and it is up more than 200% from its March 2009 low.
The importance of the Bank of Japan’s move to stimulate its economy is seen in the iShares MSCI Japan ETF (EWJ), which had its largest one-day gain in six years, up 5%.
Note the big breakaway gap from $11.54 to $11.95. Gaps of this nature are not usually closed, especially when accompanied by a big increase in volume.
Conclusion
U.S. economic stimulus has had an impact on the thinking of policymakers in Japan and other nations. With the exception of Europe, because of its union of many countries with disparate economies and its inability to form a cohesive policy, emerging market nations are planning similar strategies.
Will this have a positive or negative impact in the long run?
I believe the impact is short term, and at some point, “the piper must be paid.” However, for the short term (one to four years), the impact could be a dramatic increase in stock prices in nations that take a strategic approach to stimulate their economies.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
