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There are good reasons for the positivity for stocks this week. But what could undo it?

Brexit! Italian Banks! Trump! And US stocks hit all-time highs - crazy!

Peter Switzer
13 July 2016

By Peter Switzer

Are the Yanks off with the pixies, or is their stock market at an all-time high believably sustainable? Apart from being an intriguing development (the highest readings ever for the most important stock market indexes in the world and in history), these highs are important for those who follow this trend and invest now and also for those who think they’ve missed this leg up and will wait for the next sell off. 

To be fair, there are good reasons for this positivity for stocks this week and here are the reasons:

  • The US got 287,000 jobs rather than the expected 165,000, which means the world’s biggest economy is growing better than pessimists were predicting.
  • Japan looks set for a big stimulus program after Prime Minister Abe’s political party had a landslide win in upper house elections. This means the third biggest economy in the world will be demanding stuff and helping global growth as well.
  • The UK has a new PM in waiting in Theresa May and the market liked it well enough. I suppose Brexit brought a lot of uncertainty and one of them was, who would be PM?
  • The Bank of England looks poised to cut interest rates this week after keeping its official cash rate at 0.5% since March 2009. A 0.25% cut on Thursday is tipped and the rate could go to 0.1% in a year’s time.
  • Here in Australia we now have a Prime Minister and Government in place and that’s good for investors. Investment in, say, our banks is more likely to happen, remembering Labor wanted a Royal Commission into banks.
  • Something is going on that has meant that the prices of commodities have started to rise and mining stocks have become popular again. This could mean two things and both point to a slightly more positive view on the future. Rising commodity prices can mean that the global economic outlook is looking better. Most of the reasons cited above point to more central bank and government stimuli in places like the UK and Japan, while the US economy seems set to grow better under its own steam.

Putting it all together, you can see why positivity is outweighing negativity. The key question is: how far can this go? Those who lead markets up and down (institutions, fund managers and their ilk) can buy when scary things like Brexit happen. And they can be buyers when US job fears do silly things to companies’ values when stock prices slide, as they have.

Smarties have seen a buying opportunity and PM Abe and the Bank of England will help them make money. The European Central Bank will also be in a helpful mood, with EU anxiety rising because of the Brexit vote.

And even China is expected to be more pro-stimulatory, with growth-related data out on Friday. 

So what could undo this positivity?

Reporting season is starting in the US this week and we kick off in August. The expectations for good earnings results are only OK. If they’re worse than OK, then these recent stock buying sprees could be unwound by the same people who pushed them up in the first place.

Another ‘fly in the minestrone soup’ could be if the Italian banks end up rocking confidence in other financial institutions. And a really bad number or two out of China this week could be short-term unsettling, which could spur the smarties to sell.

And of course, there is Trump and his potential to spook financial markets.

It is intriguing how bad news such as Brexit has actually helped global growth prospects, with the Bank of England set to cut rates to stimulate the economy. Before Brexit, rates were expected to rise.

I don’t think the stock market’s reaction is crazy — stimulus helps growth and that should help company profits and it says that interest rates will be lower for longer. Add it all up and it makes quality stocks more appealing, at least for the moment.

I’ve told you for a long time that if all this monetary stimuli results in good economic growth then it was worth it and we will see stocks head higher. However, if we have to pull out the R-word for recession, then it could be carnage on global stock markets.

Fortunately, at the moment, the opposite is happening, explaining this stock market positivity. Long may it be so. 

The next big watch issues ahead for us here will be the inflation number on July 27 and reporting season. However, I think that it will be bigger and more impactful external events that will be the big drivers of stock markets and Donald Trump is only one of them.

Go the UK, Japan, China, Europe, central banks and Hillary!

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