Four Reasons Why I’m Getting Bullish On The Market
The market got off to a great start in 2012. From January through early April, it made a steady upward climb. In fact, the S&P 500 Index gained nearly 13% in that time.
Then, the wheels came off a bit.
Investors began worrying once again about the financial crisis in Europe and slowing growth in China. They feared these two major macro events might drive the global economy into recession. And as a result, they sent the market on a downward march.
At one point, the S&P 500 had even retreated by almost 10%.
But after hitting bottom in early June, the market has been trending higher. The S&P 500 has gained over 6% since then and is now up 7.9% for the year.
The big question on everyone’s minds now, of course, is whether the market will continue moving higher from here?
While it’s difficult to call short-term moves in the market, I’m feeling more confident than ever the market will post gains for the year. In fact, I’ve identified four reasons why the market should close out 2012 with nice gains.
Now, I won’t be able to cover all four reasons today. The discussion is far too long for a single article. So, I’m going to talk about the first two reasons today, and then I’ll finish up with the remaining two reasons in my article next Monday.
Reason #1: Europe’s finally getting a handle on their financial crisis.
Last month, leaders of the 17 European Union countries made a major breakthrough on plans for rescuing the region’s beleaguered financial system.
First off, they agreed to centralize regulation of European banks and bail out banks directly. Second, they reduced borrowing costs on Italy and Spain, the region’s third and fourth largest economies. And third, they agreed to stop imposing harsh budget cuts on every country in need of financial aid.
Apparently, these reforms were just what investors were looking for. Borrowing costs for Spain fell dramatically, and world stock markets spiked higher on the news.
In fact, the Dow Jones Industrials posted their second-biggest one-day gain of the year.
And it makes perfect sense…
You see, the new EU plan addresses the key concerns that have been plaguing Europe’s handling of the crisis.
The economically stronger countries get what they want… greater bank oversight and a bailout mechanism that doesn’t add to a member country’s already huge debt load. And the weaker countries get what they need… bailout funds without overly oppressive economic austerity measures.
No question about it, the European financial crisis finally appears to be stabilizing.
Reason #2: China’s is prepared to do whatever it takes to boost growth.
This is a key factor for the market to close out the year with a nice gain. You see, China’s economy is the engine that drives the global economy. If it’s not growing, it will be difficult, if not impossible, for the global economy to avoid sliding into recession.
The good news is, the measures China has taken so far appear to be working.
Remember, China has lowered bank reserve requirements three times since November. And they’ve taken the bold step of lowering interest rates twice since the beginning of June.
How do we know these moves are working?
Last week’s economic data shows they’re having a positive effect.
First off, China’s second quarter GDP figure came in better than analysts expected. While the experts were looking for growth of 7.5%, the economy grew by a slightly better 7.6%. More importantly, growth accelerated in the second quarter, gaining 1.8% over the first three months of the year.
Second, China’s struggling property market made big gains last month. According to Beijing, the value of home sales surged 41% in June compared to May.
And third, the economy saw a big increase in fixed-asset investment during the first half of 2012. Investments in industry, infrastructure, and property jumped 20.4% year over year, beating analysts’ estimates.
Taken together, these important data points show that China’s efforts to ease monetary policy are finally starting to stabilize economic growth.
And best of all, the Chinese government has indicated they’re prepared to do whatever it takes to boost growth even further.
Prime Minister Wen Jiabao said last week that China’s economic recovery has yet to build up momentum. This is important because the comments have sparked speculation the Chinese government may do more to stimulate the economy soon.
In fact, most experts are expecting the government will not only cut interest rates and lower bank reserve requirements again, but actually announce new spending to stimulate economic growth. Of course, as we saw following the 2008 financial crisis, stimulus spending is a boon for the stock market.
Bottom line… stronger economic growth in China will go a long way toward driving stock prices higher by year’s end.
That covers the first two reasons for why I’m getting bullish on the market now. Don’t forget to check back next Monday for the exciting conclusion.
Profitably Yours,
Robert Morris
Category: Stocks
