I would like to continue with my recent theme – that is, I believe stocks still have bullish underpinnings. I wrote an article on March 18, 2013, entitled Current Trends and the Influence of Central Banks. In it I suggested coordinated global central bank policies had provided for a stock friendly environment. Specifically, I wrote:
“On the other hand, in spite of massive interventions which are still being tested, it appears global central banks have coordinated efforts in such a way that until now, commodity, currency, and Treasury price stability have been reasonable; and this perhaps has contributed to a stock friendly environment for some nations.”
Back then the S&P 500 Index was at 1552.00, while just recently, a little over one year later, it moved as high as 1897.00.
If the underpinnings I suggested then are indeed the key ones still influencing investor sentiment, then perhaps the stock market is not headed for the bear market some predict. Why do I entertain this thought? The same price stabilities I presented in the previous article remain in place in regard to interest rates, commodities and currencies. Please allow me to present charts that confirm this.
The first chart is a weekly bar of the Goldman Sachs Commodity Index. After a wild ride up during the early 2000s, followed by a precipitous fall after the 2008 onset of global financial turmoil, the index has moved quietly sideways for an extended period, confirming the lack of inflationary pressure within the global economy. I believe the stock market relishes this chart.
The second chart is a weekly bar of the US Dollar Index. When you observe the dollar’s recent benevolent nature, it becomes rather obvious that at least until now any talk of currency wars are conjured up perceptions rather than reality. In my opinion, this chart instead confirms the efficacy of a coordinated global effort to reign in currency volatility during an obviously challenging time. Once again I think the market enjoys this chart.
The final chart that I believe has thus far put stock investors at ease is the yield chart for the U.S. 10-Year Treasury Note. Although the sideways nature of this chart has slightly more gyrations than the previous two, it still has an obvious benign nature to it, particularly when considering the scope of the recent financial crisis. However, you might think because of government bond purchases the Treasury market is unfairly valued, and I understand this. But I offer food for thought with the following sarcastic conjecture. Please forgive me, but this is exactly what I may have told a trader friend who possessed similar thoughts had these circumstances presented themselves during my trading years. If you believe you have enough bucks and conviction to move Treasuries to where you think they are fairly valued, then go for it. I instead will play the trend.
In conclusion, I cannot guarantee that commodity prices, currency valuations and Treasury yields will remain tame. Nor can I be certain that even if they do, stocks will continue moving higher. But the charts I presented certainly seem to confirm that until now fears about inflation, currency wars, and deleterious rising yields have been premature. Furthermore, it is my opinion that these market price stabilities have perhaps been subconsciously viewed favorably by stock market investors, and have therefore contributed at least partially to the recent bull market for stocks. I believe further market gains are possible if these stable market prices continue.
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