Insights & Advice

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A virtuous circle

This week the stock market made a series of minor new highs. But China’s surprise move to lower interest rates caused global markets to surge on Friday.

November and December are typically the best months of the year for stocks and it appears 2014 will not disappoint. Remember too that the week between Christmas and New Year’s is also great for equities.

China’s move to lower interest rates caught the markets by surprise. As the Communist Party steers their central economy from an export-led to a consumer-driven market place, growth has naturally slowed.  GDP has been muddling along at roughly a 7% growth rate, down from over 12% in their heyday of massive exports.   In an effort to shore up the economy during this transition period, authorities have used fiscal policies to boost growth but have not used monetary stimulus in over two years.

I am assuming the Chinese central bank has studied our own monetary blueprint for stimulating the U.S. economy, as well as the efforts central banks in Europe and Japan are undergoing. Therefore it seems natural that lowering interest rates would be a useful tool in propping up their economy as it transitions.

If we look at the world’s main economies today what we see is a strong U.S. economy where monetary stimulus is winding down. In comparison, the world’s second and third largest economies (China and Japan) as well as Europe are all in the beginning or middle of their own easy money policies. As their economies begin to expand this should lead to a virtuous circle. Future growth in their economies will generate more global trading, which will generate additional growth in the U.S. and so on and so on.

Where does that leave us? In my opinion, we have set the stage for a good run that could conceivably last over the next few years. Somewhere along the way, we might find that other economies and markets will grow faster than our own. In any case, equities remain the place to be for the foreseeable future, regardless of where you invest.

Here at home, you may have noticed that the holiday season is upon us.  I’m not talking about just Thanksgiving. Wherever you look or listen, Christmas commercials are present and increasingly cluttering up the air waves.

I am not here to debate whether that is appropriate. The retail sector doesn’t care what I think; it’s all about sales and more sales.  With many questioning how well the retailers will do this year, (although with lower gas prices, they should do well) the sector is getting an even earlier start to the selling season. However, it just might have a subtle “feel good” effect on how U.S. investors view the market.

The President’s unilateral decision to give more than 4 million illegal immigrants a chance to apply for work permits will raise the rhetoric level in Washington, which could be a negative. The GOP will threaten and bluster, but I’m not expecting anything drastic to occur (such as a debt ceiling confrontation or a government shutdown). Republicans need to show they can do more than say no if they want a chance at winning the presidency in 2016.

Posted in A Few Dollars More, At the Market