Will Stocks Head Higher From Here?
US stocks closed out their best third quarter since 2010 last week. For the three month period ending in September, the S&P 500 finished in the black by a solid 5.9%.
That move puts the popular large cap index up over 14% year-to-date.
I know it’s hard to believe. With all the negative fundamental data out there, you’d think the market would be in a continual downward slide.
I mean… unemployment is rising, GDP is growing at just 1.3%, housing prices remain depressed, consumer spending is stagnating, and on and on and on.
The disconnect between weak economic data and rising stock prices has more than a few investors scratching their heads. It just doesn’t make sense.
Well… it only fails to make sense until you take into account the recent efforts made by the central banks.
In mid-September, the Fed announced a third round of quantitative easing. The US central bank pledged to buy an additional $40 billion of mortgage-backed securities every month.
And unlike the previous two rounds of QE, this one has no time limit.
Fed Chairman Ben Bernanke said the central bank will continue the purchases as long as “the outlook for the labor market does not improve substantially.” In other words, the Fed is committed to doing whatever it takes with monetary policy to boost employment levels in the US.
The Fed’s move followed a key decision by the European Central Bank (ECB) in early September.
After months of refusing to even consider quantitative easing, the ECB finally gave into reality. With Greece in shambles and Italy and Spain on the brink of collapse, the central bank said it would make unlimited purchases of bonds issued by struggling members of the European Union.
And the message from the world’s two most important central banks was just what investors needed to hear.
You see, investors all over the globe were concerned the European financial crisis was poised to destroy the European Union. And they feared a break-up of the EU would trigger a global economic depression.
In addition, investors were worried the fragile US economic recovery was about to unravel. And rightfully so. There’s no way the US economy can make a meaningful recovery as long as unemployment remains a problem.
So, to put it another way, investors were starting to give up hope anything could be done about these serious problems. And that was potentially a very dangerous situation.
If the majority of investors truly gave up hope, the global financial system would be in serious jeopardy.
But thanks to the central banks, hope has been restored… at least for a little while. Fears of an EU collapse or a US economic meltdown have been put to rest for the time being.
And now, investors are focused once again on making money in the stock market.
I think this newfound optimism will last through the end of the year. By not putting an end date on the current rounds of QE, the central banks have provided the reassurance investors needed.
What’s more, as we’ve seen before, QE tends to boost stock prices. Remember… after QE2 was announced, large cap stocks increased by 15% to 20% and small cap stocks surged by a whopping 30%.
Look for history to repeat itself. Thanks to the open-ended nature of QE3, investors are likely to drive stocks higher into the end of 2012.
Profitably Yours,
Robert Morris
Category: Stocks
