S&P 500 May Extend Rally on Stimulus Hopes and a Weaker US Dollar

The US market has not been this far behind the curve since the Great Depression. Will history repeat or is the US market “craving for growth” and looking to the government to help it along? The European Central Bank just devalued its currency, which, by itself, has markets worried. However, Europe is far from the US in terms of economic strength. Is the US market lagging behind its European counterparts? The answer may surprise you.

One of the factors that may have a significant impact on the US market, is the state of the global economy. Europe is in a deep recession, but the US is still on an uptrend. If Europe were to follow suit, global economic indicators would be worse. US economic indicators are currently far above those of Europe. This is probably due to the fact that expectations are high due to the stimulus program. If European leaders decided to reverse course and cut spending, global economic indicators could suffer.

Another factor is the state of Europe’s economic policy. European countries are in a severe economic crisis, with many government spending cuts. If European leaders were to suddenly cut spending and increase taxes, global economic indicators could be worse. A weaker euro can mean slower purchasing power for European companies, and higher import prices for the United States.

This brings me to one of the more fundamental economic issues affecting the dollar. Europe is a major exporter of oil and natural gas. In terms of per barrel production, Europe is second only to Saudi Arabia. If Europe were to ever stop exporting oil, its consumers would suffer. In addition, if Europe attempted to increase tariffs on imported goods the effects on the U.S. economy would be severe. How much worse off will the United States be if Europe decides to withdraw from the gold standard?

The stimulus program and global economic indicators do not directly affect the Swiss National Bank. However, the Swiss government could decide to hike rates in an attempt to increase the Swiss income through international trade. If the Swiss economy suffers as a result of this action, Swiss consumers will suffer. If the Swiss economy takes a hit, so will the Swiss National Bank.

This bears more on the American consumer. When the S&P 500 starts to trend upwards, it attracts more buying pressure from institutional investors who take advantage of its momentum to make money on their stocks. Stocks that have already begun to rise in anticipation of a breakout are often bought at inflated prices by these investors in order to lock in profits. If the market continues upward, they lose their profits when the market contracts and they are forced to sell their investments to cover losses.

In the past, institutional investors have bought stocks that have been bullish on a technical basis, such as the direction of the market or strength of the corporate sector. In an environment where the government is trying to stimulate economic activity, these investors have become less cautious in their buying habits. One negative sign of this trend is that since the United States has been in a global recession for the last two years, equities are now reflecting that fact. Investors who were formerly bearish on stocks are now holding shares in equities that are considered to be on the strong side of the market. There is also a strong correlation between economic indicators and stock performance.

Economic indicators, including the Consumer Price Index (CPI), are known to be highly correlated with stock performance. If the market turns north, earnings expectations may become overly optimistic causing companies to earn more than they plan. If the market turns south, earnings may become too disappointing and companies may suffer a loss in capital funding. The market may continue to remain on a bearish sentiment until the US economy turns around and economic indicators improve. Over the past year, it appears that economic indicators are supporting a weaker US dollar, which may continue to support the markets.