Optimism Triggers Global Market Rally
Since hitting its low on March 9, the S&P 500 Index has rallied 51.9% going into today – an unprecedented annualized rate just north of 110%. What’s even more amazing about the bullish action in the markets is that it’s taking place during a prolonged recessionary period with high unemployment that continues to dance with a double-digit rate.
However, the S&P 500 is not alone. Other cap-weighted indices have also posted remarkable gains for the same time period: The FTSE 100 is up 39%, and the Hang Seng has rallied an astonishing 80% since March 9.
Many international stock markets jumped higher after the upbeat comments from the Federal Reserve's chairman Ben Bernanke.
IBT Commodities reports that at the annual central bankers symposium, “Bernanke said that near-term growth 'appears good' and the global economy is 'beginning to emerge' from recession.”
Those comments sent international markets higher. In Europe, benchmark indices opened higher with the U.K.'s FTSE 100 Index gaining +0.6% to 4,880, the highest level since October 2008. Germany's DAX and France's CAC 40 also gained about +0.6% to 5,490 and 3,635, respectively.
In Asia, the MSCI Asia Pacific Index gained +2.5% while Japan's Nikkei 225 Stock Average added +3.4% to 10,581.
CNNMoney’s Alexandra Twain reports, “Stocks have had a surprisingly upbeat summer, as investors have welcomed a number of better-than-expected quarterly results and economic reports.”
That’s a lot of ground recovered, and it has some newswires covering their tracks.
“Many veteran traders have hailed improved readings of U.S. manufacturing, corporate profits, and other indicators. But at the same time, many are on guard against a possible correction from the market's sharp run higher from its springtime lows,” writes The Wall Street Journal.
If a correction comes, it might come as a result of a weak consumer, says the WSJ.
Will Fed's Upbeat Comments Rally Consumers?
The one other important measure of the economy that investors are counting on for an overall reading of the economy is consumer sentiment.
In fact, the final two pieces for full economic recovery will be jobs and consumer spending.
But not all economists are sold on this economic recovery. Richard Yamarone, director of Economic Research at New York-based Argus, reports that total bankruptcy filings surged by 15.3% in the second quarter – considerably higher than the increases of 9.7%, 2.1% and 5.7% registered in the previous three quarters. The uptick in filings is most likely a direct result of the high unemployment figures; if the jobs outlook doesn’t improve soon, bankruptcy filings are certain to rise.
The argument to counter Mr. Yamarone, however, is the piles of cash being held in money market funds. According to data from the Investment Company Institute, there is $3.6 trillion sitting in U.S. money market funds, down from nearly $4 trillion held in March, but much more than the $3.2 trillion held at the start of 2008.
Consumer Sentiment
The markets responded positively to news about consumer sentiment, which seems to be on the rise. Yahoo News says, “Americans' pessimism about the economy appears to be lifting, with consumer expectations for the next six months hitting their most positive point since the recession began.”
In fact, the Conference Board said its index of consumer confidence rose to 54.1 in August from a revised 47.4 in July. The improvement stems partly from the housing market, as a national gauge of home prices on Tuesday posted its first quarterly increase in three years.
These recent reports sparked a broad market rally that had all three major indexes closing at new highs for 2009. World stocks rose to 10-month highs.
Overall, the Dow Jones Industrial Average rose 30.01 points, or 0.32%, to 9,539.29. Wednesday was the sixth straight gain in a row for the bellwether index and marked its highest close since Nov. 4.
On the other hand, “The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for August fell to 65.7 from 66.0 in July,” reports Reuters.
But that’s higher than expected…
The preliminary read on August sentiment, released Aug. 14, matched the March low of 63.2. The final read was expected to show a slight uptick to 64.0.
The actual reading is still below the May-July average, but the number is critical to spending patterns of American consumers. When confidence is high, people will be more likely to spend and increase their discretionary budgets. And, with a stock market returning 8+% in July and a dip in the unemployment rate, many traders may be forecasting their own upside surprise with the revision.
Opportunity Arises
So who will benefit from all this optimism in global markets? There are many sectors that investors should look at as optimism floods the markets.
“If the data in consumer spending shows improvement, you’ll likely see a major jump in the Dow, Nasdaq and S&P 500,” says Editor Michael Robinson of BreakAway Investor.
“That will also lead to some great buying opportunities,” he adds. Michael has already positioned his readers into some up-and-coming technology companies. A rally in the Nasdaq will send the stock prices higher, locking in strong gains for readers.
Retailers could also be poised to rally now that the final read of the consumer sentiment data exceeds consensus expectations. Consumers will most likely return to their shopping ways knowing housing, sentiment and the jobs picture are all improving.
As Ian Pollick, strategist at TD Securities recently said to Mortgage News Daily, “The U.S. consumer continues to be hit-hard, though conditions are definitely moving in the right direction.”
But there’s always a caveat, isn’t there?
A Warning…
Editors at the Taipan Publishing Group warn that the U.S. dollar is still in trouble, and that could have strong effects in investors down the line.
Kent Lucas, editor of Taipan’s Safe Haven Investor, writes, “Most editors agree: The outlook calls for a weaker dollar.”
Kent quotes Warren Buffett:
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
And when purchasing power melts away, so will consumer power.
Kent says that U.S. debt is projected to climb to 100% of GDP by 2011… And that we’ll have to pay for that debt with freshly printed dollars.
“Neither Warren Buffett, myself nor many others are saying that a weak dollar scenario will be here next month or even this year,” writes Kent. “But we all believe ‘the Greenback Effect’ is inevitable.”
Kent’s Taipan's Safe Haven Investor portfolio is ready for the “Greenback Effect” with hard asset recommendations and short-term plays in the industrial goods sector.
Harinder Singh, editor of Currency Profits Trader says, “The strength in European and U.S. markets makes many of us wonder… how far they will go, particularly when Asian markets are slowly correcting down.”
Mr. Singh suggests that the housing data doesn’t tell the entire story. He says, “The positive existing home sales data of last Friday does not impress me, since these sales merely change ownership without creating the need for additional construction, which leads to new furniture, appliances, carpets, lumber, plumbing and what not.”
While Mr. Singh enjoys the rally in the markets, he’s concerned that major currencies, especially the dollar, seem to continue their relationship with equities, which are defying gravity. He anticipates a correction and has recommended readers of his service take positions in certain dollar ETFs.
So whether market optimism sustains this global rally, or the tight-roped greenback starts to topple, Taipan Publishing Group editors have got you covered with these investment opportunities.
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