State of the Stock Market Analysis for the Week Ending July 3rd, 2016 (Markets Bounce Back and Look Past Brexit 7-3-16)
What a week it was, as we saw the major indices bounce back from last Friday’s 600-point decline in the Dow and finish the week essentially back where we were before the Brexit vote. Bulls were pleased to see the S&P 500 back above the 2,100 level on Friday, and that was a great way to head into the Fourth of July Weekend. The S&P 500 dipped below its 50-day moving average of 2,071 and its 200-day moving average of 2,039, this past week, but amazingly enough it bounced back from support down around the 2,000 level. We finished the week on a very positive note, and we are in a great spot from a technical standpoint for the Summer Rally that bulls were worried would not materialize.
So what caused this amazing bounce? There were a couple of major factors and the first of which is the-the Brexit vote. As surprising as it was, could be reversed since there are so many slow-moving aspects to being in the EU in the first place. Nothing happens quickly in bureaucratic institutions, and something called “Article 50” could come into play. Britain’s “exit” vote scared investors last week and on Monday, but once the realization kicked in that the “Brexit” would take a couple of years or more, then investors somehow reined enough confidence to step back into the stock market in a big way.
The other major factor that helped restore investor confidence this week was the heavy hint that central banks (including the U.S. Federal Reserve) were ready, willing and eager to unleash a whole new round of Quantitative Easing (QE) initiatives to prop up global economies and global financial markets. It has gotten to a point where Mario Draghi and the ECB do not even to have to have big emergency meetings and press releases to reassure financial markets. You just need a 5% drop in the S&P 500 or even a bigger drop in European stocks to know that more help will always be on the way. It is bizarre that financial markets know this and expect it (QE), but that is the investment world we now inhabit.
The one big worry right now, however, is the weakness we are seeing in European banks. The zero interest rate environment (ZIRP) is a new development, and it is difficult to figure out how banks and insurance companies make money with government bonds trading at sub-zero levels. Central banks are in a very difficult position because they absolutely will not raise rates anytime soon, and with more and more government bonds below zero, you have to wonder where this whole experiment leads. Even the yield on the U.S. 30-year Treasury bond hit a 60-year low this week. Again, most strategists have no answer as to where this unique historical economic environment takes the global economy.
But stocks bounced this week in a big way, and we have somehow avoided a broader market meltdown. Maybe it was because it is the Fourth of July, or maybe it was because financial leaders just wanted to avoid a summer meltdown. Bulls are not complaining, though, and it is mind-boggling to have the S&P 500 back above 2,100 to close out the week. Now that is quite a fireworks show following a market decline that looked to be major trouble this past Monday. The three-day weekend will give investors time to reassess the investment environment, and the vibe is that since stocks are still the only game in town, we could see that proverbial summer rally that the bullish camp has been awaiting.
Summer is traditionally calm and quiet in financial markets, but this one could be different. We have both political conventions on the way, and the U.S. Presidential election seems up for grabs. No matter what party you may be backing, it promises to be a very entertaining summer from a political standpoint. Neither party seems set on any market-upsetting moves, so maybe that is why investors shrugged off the politics of Brexit and stocks bounced back this past week. We get employment numbers on Friday, which should give us some insight into the strength of the U.S. economy, so that is what we will be keeping an eye on in the coming holiday-shortened week.
It will be interesting to see how the rest of this summer plays out, but at least we are not dealing with a stock market that is down 20% following the Brexit vote. That said, the Gorilla wishes each and all a happy Fourth of July Weekend with family and friends. It is time for fireworks and barbecuing, so have a relaxing weekend. We will be back in action on Tuesday!
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