I'm sure you all know the Rolling Stones song "You Can't Always Get What You Want." Well, contrary to what Mr. Jagger thinks, it seems like in the last two weeks that investors got almost exactly what they wanted -- and maybe a little more. First, investors got the ECB pledge from Mario Draghi about their unlimited bond-buying program 2 weeks ago. Reaction - stock rally. On Wednesday of last week the German High Court ruled in favor of allowing the nation to participate in the European bailout fund. Reaction - stocks moved higher. On Thursday, the Fed and Ben Bernanke took center stage and even with high expectations squarely on his shoulders the Fed managed to surprise the market with their announcement that QE3 would begin, would be open-ended and would remain in place for a considerable time after the economic recovery strengthens. Reaction - significant stock rally. So we now have the Fed, ECB and even China pumping money into the financial markets.
Just to give the details, the Fed announced that it would purchase $40 billion of agency MBS per month and extend Operation Twist to the end of the year so in total it will purchase about $85 billion in long-dated securities. Also, it expanded its pledge to keep rates low until mid 2015. All this with a goal of pumping up the housing market which it hopes will lead to higher manufacturing and employment. The exclamation point on the announcement was that this would be open-ended and that it would continue for some time after the economy recovers. So, by making the announcement, the Fed removed any doubt or debate as to the question of what the Fed will do next.
The easy money continues to push investors into risk assets. On Thursday and Friday we saw big moves in commodity stocks, industrials and financials. Whether this continues we shall see but investors are looking for groups that have not participated in the rally so far, hoping to make-up for missing the rally this year. History has shown that in the month following a QE announcement, the S&P tends to move higher with financial and industrial stocks leading the charge. However, before the market can go meaningfully higher we have to navigate the upcoming Q3 earnings season, the US election, the fiscal cliff, China's slowdown and of course Europe's recession and debt problems. Markets right now are full of exuberance created by easy monetary positions from world central banks. So, the plan is now on the table and execution and results are ahead of us.
In summary, this market has lived up to one simple axiom - DON'T FIGHT THE FED. (Or the ECB, or the BOE, or the Bank of China...)
Global markets rallied for a second week on the Federal Reserve move this time with the S&P 500 closing the week at 1466. up 1.94%. The Dow climbed 2.15% to 13593, and the NASDAQ closed at 3183, up 1.52%. The S&P and the Dow climbed to highs not seen since December 2007 while the Russell 2000 set a new intra-day all time high before closing a point away from the high. European stocks jumped with the Euro Stoxx 600 climbing 1.47% to 276. Italy +3.19% and Spain +3.45% recorded the biggest gains. Asia/Pac stocks rose 3.6% to 127.4 with strength across the board. Hong Kong, India, S. Korea and Taiwan all rose over 4% but China dropped .18%
In other economic news last week:
While the markets were celebrating the latest round of easing news, Moody's warned that is could downgrade the US Government credit rating in 2013 if large-scale measures aren't taken to reduce the nation's rising debt. This should be a big deal but remember what happened when S&P downgraded US debt -- basically nothing. Rates on US Treasuries hit an all-time low a few months ago and have only moved up slightly due to the rush by investors into risk assets.
Retail sales increased 0.9% in July, almost exactly the 0.8% gain the consensus expected. Sales were up 0.7% including revisions for June/July. Retail sales are up 4.7% versus a year ago.
Industrial production fell 1.2% in August coming in way below the consensus expected no change. Production is still up 2.8% in the past year. Overall capacity utilization moved down to 78.2% in August from 79.2% in July. Manufacturing capacity use declined to 77.0% in August from 77.7% in July.
The Consumer Price Index (CPI) was up 0.6% in August, matching consensus expectations. The CPI is up 1.7% versus a year ago. The rise in the CPI in August was due to a 5.6% gain in energy. There were also widespread gains in most other major categories. The "core" CPI, which excludes food and energy, was up 0.1%, versus a consensus expected gain of 0.2%, and is up 1.9% versus last year.
The Producer Price Index (PPI) increased 1.7% in August, coming in well above the consensus expected gain of 1.2%. Producer prices are up 2.0% versus a year ago. Excluding food and energy prices, core PPI increased .2% New claims for unemployment insurance increased 15,000 last week to 382,000, the most in 2 months. Continuing claims fell 49,000 to 3.28 million.
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Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtainedfrom www.ForzaInvestment.com. You can call at 908-344-9790
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