We’ve talked about the bullish technical break occurring in stocks. That’s continuing again today.
Remember, a week from this past Friday we talked about the G7 (G8) effect on stocks. We stepped back through every annual meeting of world leaders since 2009 and the results were clear. If the communiqué from the meetings focused on concerns about the global economy, stocks went higher. It’s that simple.
Why? In the post Great Recession world, stocks are the key barometer of global confidence. Higher stocks can help promote economic recovery (better confidence, higher wealth effect). Lower stocks can derail it, and threaten a bigger downturn, if not fatal blow to the global economy.
Policymakers can and do influence stocks. And thus, when we’ve seen clear messaging from these meetings about global economic concerns, stocks have done well–in most cases, very well.
With all of this said, on May 27 from the meeting in Japan, the G7 issued its communiqué and it started with global growth concerns. They said, “Global growth is our urgent priority.” The S&P 500 closed at 2,099. Today it’s trading at 2,116 and is closing in on the all-time high set in May of last year (less than 1% away).
Now, we talked in past months about the importance of Europe. The Fed’s (and the global economy’s) best friend is an improving economy in Europe. We’ve seen some positive surprises in the data out of Europe, but the actions taken this morning by the ECB could be the real catalyst to get the ball rolling–to mark the bottom, to get Europe out of the slow-to-no growth, deflation funk.
The ECB started implementing a new piece to its QE program today. Of course, they promised bigger and bolder QE back in March (mostly as a response to the cheap oil threat). Today they started buying corporate bonds as part of that ramped-up QE plan.
With that, this is a very important observation to keep in mind: Over the history of the Fed’s three rounds of QE, when the Fed telegraphed QE, rates went lower. When they began the actual execution of QE (actually buying bonds), rates went HIGHER, not lower (contrary to popular expectations). Why? Because the market began pricing in a better economic outlook, given the Fed’s actions. We think we could see this play out in Europe as well.
Take a look at this chart of German yields. This is probably the most important chart in the world to watch over the next several days.
The German 10-year bond yield traded as low as 3 basis points (that’s earning 30 euros a year for every 100,000 euros you loan the German government, for 10 years). Of course, the most important visual in this chart is how close the German 10-year yield is to zero (the white line), and then negative rates.
Remember, we’ve said before that Draghi and the ECB have made it clear that they won’t cut their benchmark rate below zero. And “that should keep the 10–year yield ABOVE zero.” Were we right? We’ll find out very soon. If so, and if German yields put in a low today on the “actual execution” of the ECB’s new corporate bond buying program, then U.S. yields would be at bottom here too.
You can see in the above chart, it’s a make or break level for the U.S. 10-year yield as well (as it is tracking German yields at this stage). While lower yields from here in these two key markets might sound great to some, it comes with a lot of problems, not the least of which is a negative message about the outlook for the global economy and thus damage to global confidence. Keep an eye on German yields, the most important market to watch in the coming days.
Biggest Shareholder Says
This Stock Should Be 160% Higher
In our Forbes Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 160% higher than where it trades today. And this is an S&P 500 stock!
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So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has suddenly bought $85 million of this stock near its 52–week low.
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