U.S. equities charged higher for the third consecutive day thanks to a combination of central bank stimulus hopes (Bank of England and European Central Bank), fading “Brexit” fears and end-of-quarter window dressing by investment professionals and fund managers.
The over-the-weekend freak out over the United Kingdom’s surprise vote to leave the European Union — which has resulted in credit downgrades and currency volatility for Europe — seems but a distant memory now.
I guess this all shouldn’t be surprising. Policymakers and market markets were always going to do what they could to boost stocks before quarterly brokerage statements are mailed. Whatever it takes to boost confidence in stocks, one the few areas of positivity left for the global economy.
In the end, the Dow Jones Industrial Average gained 1.3% the S&P 500 Index went up 1.4%, the Nasdaq Composite gained 1.3% and the Russell 2000 gained 1.8%. Treasury bonds were stronger, the dollar was better overall, gold lost 0.5% and oil fell 3.1%.
The rebound of the last three days is made all the more incredible because of a lack of any grounding in fundamentals. Stocks have gravitated toward the Dow 18,000 level for the last few months, capping a three-year-old consolidation range that started when the Federal Reserve ended its QE3 bond buying program. We’ve been sliding sideways ever since.
Moreover, the “more stimulus!” headlines that rallied stocks so hard on Thursday were hardly groundbreaking. BoE Governor Carney said more stimulus would likely be needed over the summer while the ECB is reportedly considering a change in how it allocates its bond purchase stimulus amid an ongoing melt up in government bonds that is limiting the pool of assets available to buy.
All this amid an ongoing corporate earnings recession, the looming start of the second-quarter reporting season, the specter of Federal Reserve interest rate hikes, and an uneven global economy. Crude oil looks vulnerable to fresh weakness as short-term supply disruptions ease. And an ongoing tightening in the U.S. labor market — spiked by evidence of falling labor productivity — threatens to trap the Fed in a “stagflation” scenario.
As noted by Gluskin Sheff economist David Rosenberg — the famous bear that turned bullish between 2012 and 2015 — the situation has become fragile. He recently warned clients of a “sub-par global economy, burdened by excessive debt and supply gluts in practically every market, and an equity market challenged by what is still a very murky earnings outlook” and has recommended using the current relief rally to lighten up long positions and focus on defensive assets like bonds and precious metals.
I couldn’t agree more. The bulls have a tendency to melt stocks higher into three-day holiday weekends like the Independence Day holiday closure on Monday. But once trading resumes on Tuesday and traders look ahead to catalysts like the second-quarter earnings season and the upcoming Fed policy meeting, watch for the bears to reemerge.
If you don’t believe me, and think my skepticism is unwarranted, ask yourself: Why are Treasury bonds (and global government bonds in general) as well as precious metals surging? Both are safe haven assets. And both are saying loud and clear that something is seriously amiss in the global financial system.
The iShares Silver (NYSEARCA:SLV) gained another 2.9% today to push deeper into levels not seen since 2014, boosting the July $17 calls recommended to Edge Pro subscribers to a 126% gain.
Also consider that defensive sectors led the way higher today: Consumer staples gained 2.2% while utilities gained 2.2% Hardly a ringing endorsement of confidence in stronger growth.