The European Central Bank’s magnificent march into full-scale quantitative easing captivates cheerleaders hoping for significant European (and worldwide) economic growth, a decisive defeat of the evil deflationary dragon, and further bullish ascents in stock marketplaces such as the S+P 500. Prior massive money printing, especially but not only by the Federal Reserve, engendered optimism, enhanced near-term economic growth, and helped to propel many equity benchmarks (notably the S+P 500) upward. So given the ECB’s bold policy announcement on 1/22/15, shouldn’t we all be rather positive about global (and Eurozone) economic prospects? No.
Of course the ECB’s decision to begin devouring “euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market” is only one variable. But despite that central bank’s long-hoped for purchasing scheme, adequate Eurozone GDP growth still appears out of reach, and overall international economic prospects look less robust than they seemed only a few months ago. In addition, despite the ECB’s dramatic policy intervention, key government securities yields show little signs of climbing. This holds true not merely for Germany, but also the United States and Japan. Plus the broad real trade-weighted United States dollar remains relatively strong, nearing critical points achieved in mid-2008 during the global financial disaster. After their massive tumble in recent months, commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark) remain well beneath their June 2014 (and previous) heights.
Yet at least shouldn’t the ECB’s big easing at least manage to rally key stock arenas, and especially to push the S+P 500 above its December 2014 summit? Recall what happened to the S+P 500 after the Federal Reserve unveiled its quantitative easing rounds, or what occurred after Japan introduced “Abenomics” and Quantitative and Qualitative Easing!
However, the S+P 500’s inability thus far to creep up to new bull trend highs beyond its 12/29/14 summit at 2094 contrasts with its prior behavior after the Fed’s QE programs. Again, keep in mind recent yield patterns of key government yield signposts such as the US and German 10 year notes, as well as the stronger dollar and weaker commodities. Also, emerging stock marketplaces in general, with various twists and turns, gradually have sagged lower since their spring 2011 high. So although admittedly not much time has passed since the ECB’s December action, these interrelated factors and slipping world growth prospects indicate that the ECB’s new policy probably will not produce the hoped-for rally in the S+P 500 and related stock playgrounds. These present-day marketplace variables, especially when interpreted alongside their history during the mournful 2007-09 global economic crisis, instead suggest that a notable S+P 500 downtrend is or soon will be underway. And in today’s environment, what happens to American stocks if overall US corporate earnings slow or move into reverse?
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Negative Creep- the Global Economy (2-2-15)