Week In Review: The Central Bank Put Is Alive & Well
The Central Bank Put Is Alive & Well
Stocks snapped a three week losing streak and the benchmark S&P 500 jumped and closed above its 50 day moving average line for the first time since early January (healthy sign). Buyers returned after the European Central Bank (ECB) announced that they will print $60B euros a month to reflate their economy and their market(s). This concept is also known as the central bank put. The central bank put is a powerful investment theory that suggests global central banks will step in and stimulate both Main Street and Wall Street – if conditions deteriorate. Therefore, the bulls argue that one can safely buy stocks in anticipation that the market will either rally on its own or that global central banks will pump more money into the system to “reflate” asset prices. In both scenarios, the market will advance. This was the prevailing investing mantra since the 2009 low and is exactly what happened last week. Indeed, we live in very interesting times.
Monday-Wed’s Action: Stocks Quiet Ahead of ECB Meeting
U.S. stocks were closed on Monday in observance of the MLK Holiday. Stocks edged higher on Tuesday as investors waited for Thursday’s much anticipated ECB meeting. Crude oil plunged another 5% as it continued to flirt with $45/barrel. The market received some disconcerting news from the housing market. Home builder and realtor confidence fell slightly in January and just missed estimates. The housing market is a critical component of the broader economy. Stocks rallied on Wednesday after Canada’s Central Bank (Bank of Canada, a.k.a. BOC) surprised the Street and lowered rates to stimulate their economy. The BOC wants to get ahead of the negative impact falling oil prices will have on Canada’s economy. The BOC cut rates by 25bps to 0.75%. Separately, ECB’s Executive Board released a note that hinted the ECB will buy 50 billion Euros of sovereign bonds each month through 2016, which was almost double what economists had expected.
Thurs & Fri’s Action: Stocks Rally After The ECB Fires a Bazooka
Stocks soared on Thursday after the ECB followed through and announced a stronger-than-expected plan to stimulate their lackluster economy. The ECB kept rates unchanged near zero which matched expectations but the big news came when the bank said it will buy at least 1.1 trillion Euros of government or agency debt over the next 20 months (until at least September 2016), which roughly equals 60 billion Euro per month. This plan topped the 50B that was announced on Wednesday. ECB President Mario Draghi was very aggressive and made it clear that the bank will purchase bonds of maturities of 2 to 30 years and at a negative yield, if necessary. This is more than double the size of the Fed’s latest bond purchase program. Not to be out done, the Danish central bank slashed its deposit rate to -0.35% from -0.2% previously, which was aggressive and also topped estimates.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been the primary theme for the last 18 months. Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, this market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.
Here are the stats as of Friday’s Close,
- Nasdaq Composite +0.5% YTD
- S&P 500 -0.3% YTD
- Dow Jones Industrial Average -0.8% YTD
- Russell 2000 -1.1% YTD
