State of the Stock Market Analysis for the Week Ending March 13th, 2016 (The Stock Market Stalled Out 3-13-16)
It was a bumpy ride for the stock market this week, but the stock market managed to close out the week on a very positive note, with the Dow and the S&P 500 hitting their highest levels of the year. The Dow and the S&P 500 were up about 1.1% each for the week, while the Nasdaq gained about 0.7%. Mario Draghi and the ECB provided some of the upside fuel, and seeing the ECB cut rates to -0.4% clearly helped motivate buyers. The ECB’s promise for yet more QE and massive bond purchases of $88 billion per month also seemed to help global markets rebound and close out the week with solid gains.
Draghi’s move shows that he and the ECB are is still willing to use his “bazooka” and do “anything it takes” to keep financial markets in Europe alive and kicking, but having rates now at zero and negative bond yields in several countries, has critics swarming. The ECB is “all in now,” and how it will react to future problems is the big question. The U.S. Fed is constantly leaning toward raising interest rates, but the ECB seems hell-bent on keeping the party in Europe going at all costs. Cash controls are already springing up in Europe, and who can blame Europeans for wanting cash under their mattresses earning zero instead of keeping money in a bank?
What also helped put investors in a good mood this week was the nearly 7% rise in the price of oil, and the subsequent rise in oil-related companies definitely helped drive the Dow and the S&P 500 to those 2016 highs. The “correction” of roughly 10% in the S&P 500 through February has pretty much been erased. While higher highs seem in the cards, there are still some obstacles for the stock market to move past. The Federal Reserve meets next week, and we all know that the Fed is still flirting with the idea of raising rates. Had the stock market still been down 10% or so for the year, it would have made a rate hike unimaginable. Likewise, if we had oil trading below $30 per barrel, a rate hike would be impossible as well.
But we have a renewed rise in the seven-year-old bull market, and we have seen continued strength in economic numbers. While the “data-driven” Fed suddenly might have enough data to maybe not raise rates next week, it does have enough “data” to at least “suggest” rate hikes for later in the year. Whether that sets in motion another stock market downturn remains to be seen, but the Fed is definitely moving in the opposite direction of the ECB. The 25 basis-point rate hike in December preceded the January-February correction, so the thought of renewed Fed “hawkishness” next week is keeping global markets and investors on edge.
The Nasdaq has been lagging a bit during the recent bounce back rally, which is something we will keep an eye on. Silicon Valley has been seeing layoffs and a quiet slowdown in the “private equity” tech bubble. Several IPOs of the past year or two have been miserable performers, and there are layoffs and capital squeezes in the recently “red hot” tech world. Companies like Twitter (TWTR) and GoPro (GPRO) come to mind. Silicon Valley is always in a boom or a bust, but the recent cool down is definitely worth noting as we watch this recent rebound in the broader stock market. It is always a plus to have tech on board for any stock market rally.
Politics are still front and center, and the ongoing string of debates is playing out quickly. Trump and Clinton seem to be gaining momentum, but we will just have to wait and see how this whole process unfolds. Financial markets do not seem overly alarmed, though, and markets seem more concerned about the ECB, the Fed, economic numbers and the price of oil. Presidential elections are a long, complicated process, but with the November election just eight months away, it will be here before we know it. For political fans, it is thoroughly exciting just the same.
We did close out the week on a positive note, though, and that has the bullish crowd feeling optimistic, especially seeing the S&P 500 close the week above the 2,000 level (which is also its 200-day moving average). This is a big positive from a technical standpoint, and it puts bulls in a good position as we await the Fed meeting and announcement next week. That said, the Gorilla wishes each and all a relaxing weekend. Spring is on the way, and we may have just avoided a big market downturn that looked very likely in late-February. We will be back in action on Monday. So again, have a great weekend but be prepared for what could still be a challenging year for investors.
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