Monday 7 January 2019

S&P 500 may be near bottom as Fed chairman signals flexibility on interest rates

Despite a sharp drop on Thursday, the S&P 500 finished last week with a 1.9 percent gain, thanks to a 3.4 percent surge on Friday. It was its second consecutive weekly gain.

Ari Wald, a technical analyst at Oppenheimer & Co, thinks that the worst of the selloff is behind the market.

“We expect a bear market rally to develop over the coming weeks, and we expect a new bull market to develop over the coming months to quarters,” he said.

Based on past bear markets, he thinks that “the S&P 500 has endured the bulk of the magnitude and now requires time to base”.

Similarly, Tobias Levkovich, chief US equity strategist at Citi, said that “the data suggest that we should be buying into current weakness”.

Meanwhile, analysts at Bank of America Merrill Lynch noted that its Bull & Bear indicator is indicating “extreme bear”, which could be a buy signal for stocks.

And what has been driving the bull market, its recent decline and latest recovery? According to Sven Henrich, founder and the lead market strategist of NorthmanTrader.com, it is central bank policy.

“Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth,” he wrote on MarketWatch.

“When did global central-bank balance sheets peak? Early 2018. When did global markets peak? January 2018.”

Henrich said that the market surge on Friday was triggered by remarks by Federal Reserve Chairman Jerome Powell that he is flexible on interest rates.

However, Henrich warned that for central banks to keep the bull market alive requires ever-lower rates, which would enable debt to keep expanding, while each recovery produces less and less organically driven growth and ever-higher wealth inequality.

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