If we don’t get a stock market bounce soon, the S&P 500 Index is at risk of breaking its 50-day moving average. This isn’t critical, but the index’s 200-day moving average is just a few more points away. For the most part, we’re getting stable, as-expected corporate earnings with tempered forecasts for the next two quarters. Accordingly, the only way that we’re going to get a new stock market bounce this year is through additional monetary stimulus from the Federal Reserve. Wall Street is just salivating for this to happen.
The stock market produced very choppy trading action since the market correction turned at the beginning of June. A solid stock market bounce from the correction low (around 80 points on the S&P 500) was met with a meaningful pullback, only to happen twice again over the last month. (See “The Stock Market and Investor Sentiment Tank—QE3 Anyone?”) Getting these upward stock market bounces to last has been difficult.
The sovereign debt crisis in Europe still is the biggest drag on the U.S. stock market and domestic investor sentiment. It remains the single biggest risk to your pocketbook (aside from war), and it’s created a lasting malaise, draining stock market expectations. Given the earnings outlook for the rest of the year, I really feel that new monetary stimulus from the Federal Reserve is the only way we can experience an upward stock market bounce with some staying power.
Interest rates are already artificially low, and as a form of monetary stimulus, they can’t really go lower. The Federal Reserve can continue to buy longer duration bonds, but at the end of the day, any new policy action is really just window-dressing to help the stock market and Wall Street feel like something is being done to help. The U.S. economy just has to keep working out its excesses before a new business cycle can begin. Another one or two years, I figure.
I think it’s likely that the Federal Reserve will take some form of additional action in the near-term, and we will get a stock market bounce out of it. As this earnings season has proven, some industries and companies are doing much better than others. As a portfolio strategy, sticking with current stock market winners is key.
I’m certain that Ben Bernanke wants to act and is trying to convince other central bank governors. The stock market is pining for action from the central bank, only because it wants a short-term stock market bounce in what is a very lackluster environment. Regardless, if additional stimulus happens, the business cycle will win out in the end.