A series of new historical highs rewarded investors who remained patient this year and remained invested. Unless something changes in the world of central banking, there is a good chance that further gains are in store for the stock market.
There will be pullbacks from time to time as the markets digest their gains. We have enjoyed several back-to-back gains in the stock market. The S&P 500 Index, for example, has climbed over 100 points without one down day. That is not something that can continue unabated.
The key to all this upside momentum is, of course, the worldwide largesse of governments and central banks. Take, for example, the events in England this week. Although economists and traders were expecting the UK’s central bank to cut interest rates by half a percent; they didn’t. But, they also said that investors should expect a rate cut in a few weeks, once they have a chance to examine the most recent economic data from the Brexit fall out.
Then there is Japan. Prime Minister Shinzo Abe’s ruling coalition won the majority of seats in Japan’s upper house elections last Sunday. Investors interpreted that win as a win for “Abenomics.” Readers should recall that Abe and Japan’s central bank has poured mountains of money into the Japanese economy. Despite that effort, Japan’s economy remains in limbo.
Abe and his government plan to spend even more in the months to come. Given that we are talking about the world’s third largest economy, more stimuli will wash around the world holding interest rates down and financial markets up.
Of course, our own central bank’s efforts to hike interest rates is now “on hold” for the foreseeable future. That is thanks to potential worries about the impact on Europe and the UK from the Brexit vote. Once again, global markets are in a familiar environment of slow economic growth, declining interest rates (and currencies) with nowhere to go but the stock markets.
Speaking of which, we are in the first week of second quarter earnings season. As the game begins, analysts’ forecasts for this quarter have been ratcheted down to 4-5% declines in company earnings overall. That is the sixth quarter in a row where corporate earnings have experienced a negative growth rate. The Street has been hoping (and betting) that company managements will be giving us better guidance on their future business this time around.
So far that has been the case. The big banks have been able to “beat” estimates this week. The financial sector overall has lagged the market all year. It is difficult for banks to do well when interest rates are this low. Hopefully, these earnings results will put a fire under the sector. Retail is another group where disappointments have weighed heavily on the sector. Although, these companies won’t report for several weeks, traders are also counting on good news out of at least some companies.
You may be wondering how long all of this central bank stimulus, quarterly earnings games and other financial machinations will support the markets. It has done so for at least the last five years. Even the bankers tell us that without additional government spending, their spending efforts can do no more than maintain the present environment. The bears are right: we are in an environment of smoke and mirrors. Yet, we can worry all we want about that while the markets climb higher. The “don’t fight the Fed” mentality is still the flavor of the month until it isn’t, so enjoy it.