The Market’s Underlying Bid Rolls Into November

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The major averages have rallied to fresh record highs, bolstered by rising expectations for additional European Central Bank stimulus that have been accompanied by upbeat economic data and corporate earnings in the U.S. This time last month, the Dow was in the red for 2014, but has now posted a year-to-date gain of 6.3%. The S&P 500 and Nasdaq are ahead by 10.2% and 11.3%, respectively.

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Signs of a steadily improving U.S. economy have been able to overcome concerns about growth overseas. The Federal Reserve’s exit from quantitative easing had caused some initial worries as well, but they were quickly eradicated when ECB President Mario Draghi reiterated the ECB’s unanimous commitment to stimulate growth in the eurozone.

Draghi provided investors more confidence that the ECB will expand its balance sheet in an effort to ward off deflation following a series of data points indicating that the region’s nascent recovery was stalling out. The new round of asset purchases won’t translate into hard data until the first quarter of 2015, but the perception is that it’s bullish for equity markets.

The other big surprise came from the Bank of Japan, which is aggressively expanding its fiscal stimulus plan by an additional $1 trillion yen (or roughly $750 billion dollars) under its current bond-buying program. The massive liquidity injections from both the ECB and BOJ being pumped into the market are generating a strong underlying bid for risk-on assets.

Last week’s economic calendar also delivered upbeat labor reports. U.S. jobless claims fell to their second-lowest level this year, and on Friday it was reported that the unemployment rate fell to 5.8% as the economy added another 209,000 jobs. What is becoming clear to investors is that the U.S. stands out as the one economy that doesn’t need any further fiscal support from its central bank…which in turn fuels the rally further.

Also in the mix are generally weaker commodity prices. West Texas Intermediate crude rallied from its recent low of $75.80 to $79.85 per barrel this morning; that was a nice rebound, but overhead resistance at $80 will be a big near-term hurdle for oil bulls to clear. Cold weather is set to hit much of the midwest and northeast U.S. later this week, which has kept a steady and rising bid under natural gas, currently trading at $4.27 per MMBtu.

Maybe the most intriguing development — and a bullish one at that — is how bond yields have remained stubbornly low in the wake of a recovering U.S. economy and a record run for the stock market. Rarely has this relationship existing before. Today, the benchmark 10-year Treasury pays just 2.33%, and the 30-yr Treasury pays only 3.05%.

This anomaly has been attributed to core inflation, or the lack thereof, and with gasoline hovering down towards $2.50 per gallon on a national basis and wage growth flat, there is little in the way of an inflation spike that apparently lurks on the horizon. So, we went from perfect-storm conditions in early October to Santa Claus–rally conditions just a month later. The price action has been extreme, but at least it’s moving in the right direction as we head into what is a seasonally bullish time to be invested.

Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/sp-500-dow-nasdaq-bank-of-japan-ecb-treasury/.

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