We’re mid-way through the month of April, and before Friday, stock markets had made a complete turnaround from March.
In fact, as of Friday, the S&P 500 had recovered the losses it sustained last month. But, of course, with Friday’s routing, the S&P 500 was nearly back down to where it started the month.
Friday’s selloff was sparked early that morning when Chinese officials lifted short-selling restrictions and advised against extreme margin trading. New fears that Greece may leave the eurozone, disappointing revenue results from American Express Company (NYSE:AXP), General Electric Company (NYSE:GE) and Honeywell International Inc. (NYSE:HON), and the Labor Department reporting that the Consumer Price Index increased in March also didn’t help matters.
As a result, the S&P 500 slid 1% and the Dow Jones Industrial Average dipped 1.5% Friday.
Let me explain why the foundation of the market remains strong, despite the pullback.
Market’s Foundation Remains Firm
As I mentioned briefly earlier, global stock markets have been on a solid upward trajectory in April. In fact, the Euronext 100 index has climbed nearly 2% higher and the FTSE 100 index has increased more than 3%.
What was really impressive, though, is the incredible strength of the Asian markets: In the past month, the Hong Kong Hang Seng index has climbed an incredible 11%, Japan’s Nikkei 225 index is up more than 2% and the Shanghai SE Composite index is up about 14%.
And that’s in spite of Friday’s sharp pullback!
One reason for the stunning bounce in global stock markets is that central banks continue to pump money. Of course, that means government security yields are plummeting; about 20% actually have negative yields. Given this, it doesn’t make sense to buy treasuries and bonds, so money is naturally migrating to the stock market.
The U.S., of course, is benefiting from this capital flight, as foreign capital has poured into the U.S. Investors are clearly chasing the strong U.S. dollar, which has rallied more than 20% in the past several months against major currencies. And this trend looks to continue since the Federal Reserve isn’t likely to hike up interest rates any time soon, given weak economic data and the March payroll disaster.
In addition, ultra-low interest rates are fueling merger and acquisition activity, which is also supporting a higher stock market. Companies are able to borrow cheaply, so they are aggressively buying other companies to further bolster their underlying shares. We’ve seen this happen with Omega Healthcare Investors Inc (NYSE:OHI) completed its acquisition of Aviv REIT Inc (NYSE:AVIV) at the beginning of the month.
So far this year, more than $1 trillion in deals have been announced. Fifteen of these deals, according to Dealogic, have been valued at more than $10 billion. So, 2015 is shaping up to be the biggest year ever for mergers and acquisitions.
Overall, global stock markets are starting to “melt up” due to ultra-low interest rates and the continuing money pumping at the Bank of Japan and the European Central Bank. Yes, days where the Dow plunges about 300 points can cause a bit of heartburn, but rest assured that the foundation of this market is really good, as the market continues to yield more than a bank and Treasury securities.
And also remember that we have been preparing for the volatile first-quarter earnings season for months. We target stocks with superior fundamentals, and I look for them to breakout while most companies in the S&P 500 struggle.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.