State of the Stock Market Analysis for the Week Ending January 25th, 2015 (Stocks Zig and Zag 01-25-2015)
Bulls were looking for a strong Friday to close out what had been a fairly upbeat week, but that was not to be the case. Stocks zigged and zagged early in the session Friday right around the breakeven level, but late-day selling pushed the Dow and S&P 500 deeper into negative territory. The Nasdaq did manage to finish Friday higher, but it was still a lackluster day for the stock market. It was a decent week overall, though, with the Dow rising 0.9%, the S&P 500 gaining 1.6% and the tech-heavy Nasdaq posting a 2.7% gain for the week. It was not a bad week for stocks, but it was not all that great either.
The buzz this past week was that the European Central Bank (ECB) would come to the rescue with its new QE program, and it did. The problem was that the new QE promise was even bigger than the already big expectations that were in place. Mario Draghi had promised to do “everything it takes” a couple of years ago, and the ECB’s trillion-euro plan definitely qualified as “everything it takes.” That is a massive number whether you call it euros or dollars, and after the big U.S. equity run-up on Thursday, bulls were thinking another big rally on Friday was in order.
What was interesting about the ECB announcement was that it came against the backdrop of the U.S. Federal Reserve quietly leaning toward eventual interest rate HIKES in the U.S. sometime this year. The ECB news was also surprising in that it was bigger than its early indications, and THAT caused some concerns. Does this mean the EU is more worried about things than financial markets thought, or is it just being hugely pre-emptive about what it feels “could happen.” The surprising Swiss move last week to “un-peg” from the euro was a big blow, so maybe the ECB just wanted to cover all of its bases for whatever might unfold in the weeks and months ahead.
Greece has its election on Sunday, and the buzz is that its left-leaning, anti-austerity and anti-euro party could see a big win. Throw in the death of Saudi Arabia’s King Abdullah and the government collapse in Saudi Arabia’s neighbor Yemen, and you can see why the ECB chose to launch its bigger-than-expected QE program. The ECB said that its new round of bond-buying will extend out at least until September of 2016. What is even stranger is seeing so many Swiss and German bonds now promising negative returns for any new buyers. This means that five-year Treasuries in some countries are guaranteeing that investors will get their money back, but it will actually be less than the purchase price!
Mario Draghi and the ECB are clearly worried about something, but it is not quite clear what they are worried about. Yes, deflation fears are haunting Europe, but the drastic QE program that we saw this week suggests something more. This action puts a huge amount of pressure on our own Federal Reserve that meets next week, and the buzz is that Janet Yellen and the crew might need to reverse its posturing on “normalization” and its hint on raising interest rates in 2015. Fed watchers are already saying that the U.S. Fed might reverse its hawkish leanings and “re-embrace” moves toward yet more QE here at home.
All of the positive economic news in the U.S. helped give the Fed more confidence in possibly raising interest rates, but the renewed fear of collapsing global GDP might have changed the game. Oil prices remain weak, and the buzz is that it might be caused a whole lot more by weak global demand than by OPEC or “supply” issues. Weakening copper prices, as well as a host of other issues (like the economic slowdown in China) are also suggesting that global GDP might really be in trouble. This is an issue the Fed will need to address next week, which is why investors will likely remain in a “wait-and-see” posture until Wednesday.
It was a decent week for the stock market, though, and as usual, any sort of QE from any big central bank seems to help. The U.S. Fed is the biggest of the biggest central banks, so the spotlight will be shining brightly on Janet Yellen and the U.S. Federal Reserve next week. Whether the Fed suddenly leans the opposite direction and suggests another possible “QE-to-the-moon” program is the big question for next week. We will have to see how the Greek election pays out first, so plan on keeping your seat belts fastened tightly. Oil prices and interest rates will also be in the spotlight, so next week promises to be a telling week for global financial markets.
January is still not over, so that “As January Goes” mantra is still up for grabs. January still might turn out well, so most bulls remain optimistic. It is just difficult to factor in all of the current “wild cards” and potential “global shocks” that are in play. It was a positive week for the stock market just the same, so we will just have to see what unfolds. That said, the Gorilla wishes each and all a relaxing winter weekend. The New Year has started off a bit volatile, and it will be telling to see how this upcoming week plays out. Again, have a great weekend, and we will be back in action on Monday!
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