Santa Claus visited Wall Street this year and the price action should be bullish the rest of the year. In fact, 2014 is setting up nicely.
Central banks around the world are printing money and credit concerns are low. The Fed is tapering, but they will keep their zero rate interest policy (ZRIP) in place until the jobless rate falls to 6.5%. We won’t hit the jobless target for at least a couple of years and the ZRIP was much more significant than the reduction in bond purchases.
Economic activity in Europe stumbled this fall. They were showing signs of a recovery and then the numbers fizzled. The flash PMI report released two weeks ago showed that growth is on the rise. The official PMI number will be released next week and it should be bullish. Europe has weighed on the market the last few years and this recovery could be a major global catalyst.
Many analysts feared that China would lower its growth target to 7% in 2014. They announced that the target will remain at 7.5%. If conditions start to slip, the government will stimulate and the PBOC will ease.
Japan forges ahead with its “Able Economic Plan” and they are printing money like mad. Economic conditions are improving and business confidence is at a multiyear high.
Domestic economic conditions have been good. Last week’s GDP and Tuesday’s durable goods number were much better than expected. The Fed cast an economic vote of confidence when they decided to taper.
Politicians seem willing to negotiate. A budget was passed and we will avoid a government shutdown in January. The market will expect this trend continue and the debt ceiling in February will be discounted. Republicans want to stay out of the headlines until the November elections. They believe Obamacare will implode and that they will win the Senate and the House if they keep their noses clean. That means the GOP won’t hold the debt ceiling hostage.
Corporations are lean and mean and any uptick in demand will go straight to the bottom line. Cash flows have never been stronger and companies are buying back shares at a record pace. More than half of all outstanding shares have been retired (repurchased) in the last 10 years. This alone explains why the market keeps pushing higher.
Dividend yields on the S&P 500 are higher than the yield on the US 10-year Treasury. Stocks are attractive relative to bonds.
The backdrop does not get much better. Seasonal strength will push stocks higher into year-end. January and February are typically strong months as well.
I don’t see any speed bumps ahead. Stay long and ride your profits. We got in at a very good level and this move still has room to run.
Focus on stocks that are breaking through horizontal resistance. Place your stop at the breakout price. These moves tend to last a few days and they can last a couple of weeks. When the momentum stalls, take profits.
Keep your size relatively small in this light volume environment. In the New Year we will look for opportunities to add to positions.
The market will open higher today and I am expecting it to gradually inch higher the next few days.