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.
Federal Reserve: Will It Act Soon to Jump Start the Market? was last modified: July 26th, 2012 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)