Spooked by recent market turmoil and poor economic data, the Bank of Japan shocked markets overnight by cutting policy rates into negative territory (joining the European Central Bank in pushing rates below the zero bound).
Whether this move, which smacks of desperation (since the chatter is the BoJ’s bond purchase stimulus has reached its limit), will actually lift the Japanese economy remains to be seen. But it’s a continuation of a deepening trend as global growth falters: Some $5.5 trillion in government bonds are now carrying negative yields covering 23% of global gross domestic product.
Those long-term concerns didn’t bother Wall Street, however, as shorts were squeezed. In the end, the Dow Jones Industrial Average wafted up 2.5%, the S&P 500 jumped 2.5%, the Nasdaq Composite gained 2.4% and the Russell 2000 ended the day 3.2% higher.
Also, treasury bonds were stronger, the dollar moved higher, gold was little changed and crude oil finished with a 1.1% gain to close at $33.60 a barrel.
The rise in small-cap stocks boosted the iShares Russell 2000 ETF (NYSEARCA:IWM) recommended to Edge subscribers to a gain of 7.3% since it was added last week. Edge Pro subscribers, for their part, are enjoying a 70%-plus gain in their Feb $100 IWM calls.
Technology stocks led the way with a 3.6% gain followed my materials, which rose 2.9%. Microsoft Corporation (NASDAQ:MSFT) gained 5.8% thanks to a strong fiscal second-quarter report. Skyworks Solutions Inc (NASDAQ:SWKS), a component supplier to Apple Inc. (NASDAQ:AAPL), gained 6.4% thanks to a top- and bottom-line beat and indications the worst of the iPhone inventory overhang is passing. Amazon.com, Inc. (NASDAQ:AMZN) lost 7.6% after Q4 revenue missed by 0.6%.
Chevron Corporation (NYSE:CVX) gained just 0.6% after being down 3% in premarket trading after reporting a big quarterly loss, wildly missing expectations for a decent profit. Production was up 4%, but lower selling prices hit both upstream and downstream earnings.
On the economic front, Q4 GDP growth slowed to 0.7% from 2% in Q3, missing estimates of a 0.8% gain. Personal consumption surprised to the upside despite worries of soft retail sales, while a build in inventories was a drag.
Overall, it was a good week for the bulls with the Dow rising 2.3% thanks mainly to speculation of a possible OPEC/Russia oil production cut and indications that the major central banks are embracing a renewed easing bias.
We saw that earlier in the week when the Federal Reserve acknowledged the inflation downside risks of lower oil prices. And we saw it last night when the BoJ responded cut rates in the wake of poor economic data including household spending (down 4.4% vs. estimates of a 2.4% drop) and industrial production (down 1.4% vs. the 0.6% drop expected).
Given the deep oversold condition reached last week, that should keep stocks moving higher for the next month or so until Fed rate hike expectations return alongside a bounce back in U.S. economic data and steady job gains.
We’ll know more next Friday, when the January jobs report is released. Deutsche Bank is looking for payrolls to expand 175,000 vs. the 292,000 gained in December. Also watch personal income and manufacturing activity data as well.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
