Is The Market Poised For A Big Summer Rally?
The second quarter came to an exciting conclusion on Friday. Stocks soared thanks to a last minute deal by European Union leaders to prop up the region’s ailing banks.
The Dow Jones Industrials rose 2.2% to close at 12,880.09. The S&P 500 Index notched a 2.5% gain, rising 33 points to 1,362.16. And the Nasdaq posted the largest increase of the three with a 3.0% jump to 2,935.05.
While each of the leading indices lost ground for the quarter, Friday’s rally may have been a turning point. The S&P 500 registered its largest single-day gain since late December 2011. And the Dow’s hefty one-day surge helped cap its best monthly performance since October.
Most importantly, all three major indices posted gains of around 4% for the month of June.
Talk about ending the quarter on a high note!
Investors piled into stocks after the EU signaled a willingness to do whatever it takes to hold itself together.
At a summit meeting late last week, EU leaders agreed to allow the European Stability Mechanism to inject capital directly into troubled banks anywhere in the EU. And the deal also eased strict austerity measures that had been creating instability in Greece and Italy.
The agreement was a stunning change of heart for Germany’s Angela Merkel. She had been steadfast in her opposition to any policy that would create joint liability among EU nations for rescuing any particular member’s banks.
But the deal wasn’t easy to come by…
Bloomberg reports an agreement was reached only after tough all night negotiations. And Merkel didn’t give in without getting something important in return.
In exchange for Germany’s agreement to the bank bailout policy, the European Central Bank will get greater authority to oversee, punish, and dismantle banks in the region. Specifically, a single banking supervisor will be created for the EU area by the end of 2012.
The question now is whether the EU has done enough to remove the uncertainty that has been hanging over the markets?
If investors remain encouraged the EU is on the right path, we could see a big summer rally.
It’s no secret the market has been held down by concerns the EU is on the brink of splintering apart. Just think where the market would be today if investors didn’t have to worry about the EU breaking up?
Of course, the agreement on broad principles is just the first step.
EU leaders will now face the difficult task of hammering out the pesky details. And you can bet the market will rise and fall on each bit of news that leaks out as this process unfolds.
One good thing this market rally has going for it is a potentially positive upcoming catalyst.
The European Central Bank (ECB) is scheduled to meet this Thursday to determine the next step in monetary policy. Most analysts are betting the ECB will cut interest rates.
That would be great news for the market. An interest rate cut should have a stimulative effect on the struggling EU economy.
Unfortunately, the experts disagree on just how large the cut will be. According to Reuters, the consensus estimate is for a cut of between 25 to 75 basis points.
So, here’s how the decision will likely play out…
A cut of 25 basis points would probably be viewed as a bit of a disappointment. In other words, a cut that small probably won’t help the market very much. On the other hand, a cut of 75 basis points would likely be seen as quite bullish and keep the market rally going.
Here’s the upshot…
The EU took a major step forward last week toward resolving the region’s banking crisis and economic downturn. And the ensuing market rally may have marked a reversal of the correction that began in May.
However, we’re not out of the woods just yet.
So, keep an eye on the ECB’s decision on interest rates coming later this week. That decision will likely have a big impact on whether the market rally continues or falters.
