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Stocks wrapped up a volatile October on a positive note after Japan’s central bank grabbed the baton from the U.S. central bank in the relay race to keep pumping cheap money into the global financial bloodstream.
For the week, the Dow gained 3.5 percent, the S&P 500 gained 2.7 percent, the Nasdaq gained 3.3 percent, and the Russell 2000 gained 4.9 percent. From the Oct. 15 low, the S&P 500 is up nearly 11 percent! That’s more than a typical year’s worth of gains in just 10 trading sessions.
Semiconductor stocks were in focus, rising 4.7 percent, as mid-month pessimism washed away. It helps that the PC industry is showing some new innovative spirit, with Hewlett Packard (HPQ) unveiling its very cool, kind of bizarre, projector/scanner/desktop computer dubbed the Sprout last week. Not sure who the target customer is for this thing, but I love the fact that HP is willing to push the envelope.
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| Hewlett Packard unleashed a brand new immersive dual-screen computing platform called Sprout. |
Payment processor Visa (V) jumped more than 10 percent following an earnings beat and a $5 billion buyback announcement. My No. 1 rule in investing is to never, ever count out the transaction processors Visa and Mastercard (MA). Anytime you hear someone is going to eat their lunch, like Apple Pay or Stripe or PayPal or Congress, just realize that V and MA have a stranglehold on transactions for a reason. Everyone must pay the toll.
The third-quarter earnings season continues to be strong. According to FactSet, the S&P 500 blended year-over-year quarterly earnings growth rate stands at 7.3 percent, up from 5.6 percent last week and 4.5 percent at the end of the quarter. Of the 362 S&P 500 companies that have reported, 78 percent have beaten earnings estimates, up from 75 percent last week and the 73 percent four-quarter average. The beat goes on.
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The solid finish of October stands in stark relief to the fear and nervousness seen earlier in the month — a month with a spooky reputation on Wall Street given the market crashes of 1929 and 1987 both happened with Halloween in the air. In fact, October ended up being the best month for small cap stocks in 15 months. The market gods never fail to be capricious and amusing.
The rebound has been powerful and persistent, with the S&P 500 trading more than 0.5 percent above its five-day average for the past two weeks according to the folks at SentimenTrader. The only other times this happened off of a six-month low were the bear market bottoms in 1982 and 2002.
The stage looks set for further gains as well. This is the eighth time the S&P 500 has dropped at least 5 percent in October only to reverse and close in positive territory. The S&P 500 was positive in November five of the previous seven times, with an average gain of 2.1 percent. December was also positive five times, with an average gain of 0.7 percent, according to SentimenTrader data.
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The big news in markets has come from the Bank of Japan, which surprised world markets by announcing an expansion of its quantitative and qualitative easing program, known as QQE: It’s going to an annualized rate of 80 trillion yen from the prior rate of 60 trillion yen. The plan is roughly 700 billion in U.S. dollars. The BOJ is also increasing the amount and widening the types of equities eligible for purchase. For scale, if something similar were done here at home given the size of the U.S. economy it would be worth $3 trillion a year in purchases.
Combined with an announcement from Tokyo that the nation’s public pension fund will shift its asset allocation increasingly into stocks, the news sent the Nikkei Average up nearly 5 percent in a single day last week. Overall, the Nikkei gained more than 10 percent on the week for its best five-day performance since 2009.
Japan is doubling down on the dominant theme of this cycle — cheap money stimulus — as it wages a multi-decade war against debt and deflation. It really has no other choice and the outcome is far from certain. There is a risk that Japan loses control of its currency valuation, or that countries like China retaliate and open a currency war. Another fear is that Japan’s government bond market seizes up; it’s already broken, with sessions frequently passing without any transactions.
Markets celebrated the move because of the popularity of the yen carry trade and because the algorithms employed by quantitative and macro hedge funds are programmed to pile onto such advances. Japan’s actions undercut the yen against the dollar, benefiting the yen carry positions that have benefited global stock markets for the past several years. In fact, the yen-dollar exchange rate dropped to levels not seen since 2007. This is also stimulative, and puts a bid under equities.
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While skeptics will complain about “rigged markets” and the potential risks, there are amazing profits to be had by playing along. If those with the power to create money want to create wealth by actively propping up global stock markets, why argue? Don’t slug a gift horse in the mouth.
I’ll leave you with this factoid from analysts at JPMorgan, who calculated how much of the rise in household wealth since the last peak in 2007 has been driven by the Fed’s bond buying: Of the $13.6 trillion increase, they find that the Fed is responsible for $11.5 trillion.
This fits well with the study published by analysts at Cornerstone Macro last week that 84 percent of the movement in stocks at this time is explained by macroeconomic forces, rather than individual company actions, as shown in the chart above. That is just a stunning number, and helps put a frame around what is happening.
This is not your father’s market, or even the same market we saw ten years ago. It’s the central banks’ market, and last week they made a big statement that underlined, highlighted, italicized and put an exclamation point on that view. Don’t fight it, or ignore it.
Best wishes,
Jon Markman
