It doesn’t get any better than this for the bulls. For a hundred billion in market cap to be added to stocks these days, there’s no need for new products, services, strategy or management anymore — just an enigmatic smile and expansive comment from a central banker on any random continent.
U.S. large–cap stocks have surged to new all-time highs thanks to a surprise interest-rate cut from the People’s Bank of China last week, the first such move in two years. The move was seen as a response to the slowdown in economic activity, with Chinese factory output at a seven-month low. The cut followed a similar move to loosen monetary policy in Japan and the euro zone.
|U.S. stocks shot up after a surprise interest rate in China.|
The PBOC action was a marked reversal from Beijing’s prior resistance to any large monetary policy easing for fear it would worsen the country’s trouble with bad loans, a property bubble and excess infrastructure. According to a Reuters article published Sunday, policymakers have had a change of heart on fears of a “surge in debt defaults, business failures, and job losses.” No doubt, the need to keep the yuan competitive with a tumbling Japanese yen played a role as well.
Also contributing to bulls’ better mood was the reiteration of prior comments by European Central Bank head Mario Draghi that euro–zone economic weakness and punk inflation could result in more aggressive stimulus sooner than later.
This one-two punch of monetary policy maneuvers is proof again that this is not a “stock pickers market,” as some have said, but the central bankers’ market. Cornerstone Macro data shows that the macroeconomic environment now explains 85 percent of the action in individual stocks, up from less than 70 percent 20 years ago.
Beneath the expansive gaze of banking authorities who in past decades have served as stern disciplinarians, equity bulls are on a rampage in a way that’s been rarely seen in history — sending stocks on a near-vertical ascent off of the Oct. 15 lows. The S&P 500 has been up for five weeks in a row and is up about 10 percent from last month’s lows.
The index has stayed above its five-day moving average for 26 consecutive days. The all-time record for short-term stock market consistency was in 1986 when the S&P 500 held above its five-day moving average for 27 straight days.
Also in the mix is the market’s long-term persistence, with the S&P 500 working on its 29th straight month above its five-month moving average. According to Jason Goepfert at SentimenTrader, this combination of long-term and short-term consistency has never been seen before. “Not even close,” in his words.
There were three other less long lived periods of consistent gains in market history, in late 1954, 1955 and early 1965. So it’s been awhile.
History provides evidence that the momentum can continue. Goepfert highlights that our current situation is “so abnormal as to be unprecedented in 114 years of market history (even using much less stringent momentum than we’re seeing now), but generally this kind of display is a good longer-term sign.”
The folks over at Stock Trader’s Almanac note that with the S&P 500 up more than 11 percent year-to-date, this will only be the fourth time in 84 years that stocks have gained double digits for three or more consecutive years. In all prior occurrences, the market climbed the year after the third consecutive gain for an average rise of 23.1 percent including 1945, 1952 and 1998.
Looking back at 1998, it’s worth remembering that it wasn’t all smooth sailing that year. The Russian bond crisis and failure of Long–Term Capital Management resulted in a 20 percent selloff that started that July and bottomed in October. So you had to work through some emotional pain to get the win.
And certainly, there are some worrisome catalysts that need be dealt with as we move into holiday season and the calendar prepares to flip to 2015, including a possible fiscal fight in Washington as President Obama and Congressional Republicans — in conflict over immigration and health care — face off over the need for a continuing budget resolution by Dec. 11. We also have the Federal Reserve’s final policy meeting of the year that could bring forward the timing of the first short-term interest rate hike since 2006.
And there have been some warning signs, including disappointing market breadth (73.6 percent of S&P 500 stocks are in uptrends vs. 76.2 percent back in September and 84.6 percent at the July market top) and ongoing weakness in junk bonds and small–cap stocks.
And U.S. stocks are about 16 percent overvalued right now and intermediate-term overbought, according to the PFR metrics we use — a condition that could lead to a frustrating six-month sideways stretch with a downside bias as investors wait for fundamentals to catch up with prices.
But the bigger story is that the central banks want prices higher, and they typically get what they want. Bears will get their turn eventually, but maybe not til the fourth quarter of next year once the Fed finally steps out of the way by letting rates rise.