Markets have seen a strong rally to start the year with the S&P 500 closing higher seven weeks in a row. Now the million-dollar question on investors’ minds is: Will the market continue its strong run, or has all the “good news” been priced in, and we’re due for a correction?
|Why have stocks rallied, and will it continue?|
Answering these types of questions is never easy. But one thing professional investors do is focus on why the rally has occurred, and then they can identify what key catalysts need to be monitored in the near future that will decide the outcome.
That sounds like common sense, and to a point it is. But in today’s environment of information overload and 24-hour financial news networks, it can be very hard to spot the specific reasons why stocks have rallied, and what will decide if the rally continues.
Simply put, there’s a lot of noise to break though, and it can be hard to see the forest for the trees.
With regards to this market, there are two main reasons stocks have seen such a strong rally to start the year:
- A stabilization of global economic growth, and …
- The continuation of the Fed’s easy money policies.
Stocks began their rally late in the fall of 2012 after economic growth stabilized in China, and Japan embarked on the path of further stimulating its economy. Despite the blip in December caused by the fiscal cliff drama, stocks have continued to rally — not because of improvement in Washington since there hasn’t really been any, but instead because of continued acceleration of economic growth in China and signs of stabilization in the European economies.
All that occurred while the Fed has kept its QE program at $85 billion/month, and promised low rates for the foreseeable future.
So, now that you know why stocks have rallied, you are better equipped to properly interpret the news for clues as to whether stocks will continue to rally.
What to Watch This Week …
There are two events this week that the market will be watching closely, and you should too …
The first will be the release of the “Flash PMIs” from China, Europe, and the U.S.
Purchasing Managers Indexes (PMIs) are some of the best known and most followed gauges of manufacturing and economic activity. And although they aren’t followed by the financial press, every professional investor watches them. This week’s PMIs will be very important because they offer insight into one of the two reasons the market has rallied: The stabilization of global economic growth. If these PMIs show continued stabilization, that’s a big clue the market can continue the rally. If they backtrack, that’s a sign we may be in for a correction.
And second is the release of the minutes from the January Federal Reserve meeting. These are important because they give you some understanding of the Fed’s mindset. Specifically, in recent weeks Fed officials have made comments that the QE program may end earlier than expected, and the Fed may begin to tighten monetary policy sooner than generally thought. Both have made the market nervous.
That fear is part of the reason you’ve seen gold decline recently. These minutes will offer insight into those discussions, and again speak to the second pillar of this rally: Continuation of the Fed’s easy money policies.
So don’t be distracted by the financial media or errant headlines — these two events are pivotal to the market, and should be the main area of focus of investors this week. How they turn out, could likely be the deciding factors in whether stocks make it eight weeks of gains in a row, or if a correction begins.