If investors needed proof that the market’s bottom is in, this week provided it. It was the best week of the year in stock market gains and it looks like we have more on the way.
That’s not to say we couldn’t have another pullback, but it won’t be to the levels we saw nine days ago. The S&P 500’s 200 DMA is around 1.905. That would be the logical limit to a decline if traders wanted to do a little profit-taking, but I don’t see much downside beyond that.
One catalyst that is providing support for the market is another good earnings season. Although there have been a few spectacular misses by some big technology companies, by and large, companies have beat earnings estimates and provided positive guidance for the months ahead.
Negatives do remain. ISIS is not going anywhere soon and Ebola will continue to rear its ugly head as it did this week when a Manhattan physician contracted the disease. One can only wonder why a medical doctor, who had been working with infected patients in Africa, would “self-diagnose” rather than getting checked out immediately upon returning to the U.S.
But markets rarely discount an event more than once. So far we have had several potential Ebola cases in this country and the markets have already discounted the possibilities. In order for investors to really sell-off the markets, something new and far more serious must occur.
The same goes for ISIS. Yes, the terrorists have proven to be far more resilient and tough-minded, despite bombing runs by the U.S. and its allies. However, the opposition seems to have at least slowed their advance, which is enough for the markets.
As for the worry-mongers who follow the Fed, forget about them. In my opinion, the Federal Reserve Bank will overstay its welcome when it comes to keeping interest rates low until they are convinced that the labor market has truly recovered. And that brings us to the mid-term elections, which are less than two weeks away.
Most pollsters believe that the GOP will sweep both houses of congress. All Republicans need to do, according to the consensus, is to continue slamming an already-unpopular president and stay away from the issues. As such, the stock market is going to celebrate their win by gaining ground. For whatever reason, markets initially go up when Republicans win elections, even though the historical data indicate that markets always do better under the Democratic Party.
Once elected, the GOP has two years to do something on the legislative front in order to carry the 2016 presidential elections. They cannot afford to do nothing and blame the Democrats, as they have done for the last eight years–if they want to win. So what can we expect?
At the very least, we should expect some kind of fiscal stimulus plan that will pick up where the Fed left off. Infrastructure spending, something this country desperately needs, in tandem with corporate tax cuts (always popular with their corporate supporters) might be a way of growing the economy and further reducing unemployment.
Most politicos would say that the Democrats would never go along with that and if they did, the President would veto any GOP-authored fiscal stimulus plan as a matter of course. I’m not so sure. As an unpopular, lame duck president, Obama might consider a Republican-controlled congress as an opportunity to save the reputation of his presidency. If he were to usher in a new era of compromise, even if that compromise were all his own, would he do it? We shall see but in the meantime, stay invested.