Is It Time To Be Bullish About The Markets?
This is probably one of the biggest questions on investors’ minds right now and one that comes up in conversation around the summer BBQ . So let’s take a look and a couple of the reasons that make us feel bullish about the markets.
In early 2012, the markets got off to a great start and we saw a steady upward climb in the first quarter. Looking the Dow Jones Industrial Average, the index gained 4.58%, while the S&P 500 during the same period was up 7.32%.
Welcome back Europe and China.
Investors began worrying once again about the financial crisis in Europe, which continuously saw Greece in the headlines and the ongoing debate of are they in, or out of the Euro. Then we started to hear of slowing growth in China. These two major macro events might drive the global economy into recession and as a result, we saw the market move on a downward march.
But after hitting bottom in early June, the markets started trending higher. Both the Dow Jones Industrial Average and S&P 500 have gained over 6% since then.
So the Question is can the markets continue to move higher?
While it is impossible to call short and long term moves in the markets, we also have to realize that there will always be things that are unknown today both economically and politically. However, there are some things that have been identified that we are bullish on.
The first reason is it appears that Europe is making real strides in dealing with their financial crisis. Last month the leaders that make up the European Union made a significant breakthrough on plans for rescuing the region’s beleaguered financial system.
While we wait for the details to be finalized, they have agreed to three main things. The first is to centralize the regulation of European banks and bail out banks directly. The second step taken was to reduce the borrowing costs on Italy and Spain, and the third area, is they agreed to stop imposing harsh budget cuts on every country in need of financial aid.
So what will this accomplish in what looks like a dire situation? It will first allow for stronger economic countries like Germany to see greater banking control and oversight, as well as a bailout mechanism that doesn’t add to a member country’s already inflated debt load. For the countries that we constantly see in the media it will allow them to obtain bailout funds without overly oppressive economic austerity measures.
The second factor that is being taken into consideration is China, and the government’s willingness to do what is necessary to boost growth. China’s growth is a key factor for the markets to see continued growth. We have always said that the US Economy is the engine that drives the train but in reality it is China’s economy that is driving the global economy right now. Just look at where the day to day products you use are made!! So if their economy isn’t growing it will be difficult for the global economy to avoid sliding into recession.
The good news is China has taken measures to spark economic growth and so far it appears to be working. Two measures that China has taken is they have lowered interest rates twice since the beginning of June and the Government has lowered bank reserve requirements three times since November.
So has this worked? Looking at recent economic data, it shows that there have been positive effects by these moves. China’s struggling property market witnessed significant gains with the value of home sales surging 41% in June compared to May. As well second quarter GDP was better than analysts expected with the economy growing by slightly more than 7.6%.
Another positive signal that these measures are starting to work is there economy saw a increase in capital investment during the first half of the year. This is important as it can have a significant impact on the Canadian Natural Resource Sector as investment in industry, infrastructure and property jumped 20.4% year over year.
The best news of all is the Chinese government has indicated they’re prepared to do whatever it takes to boost growth even further.
As I mentioned there will always be the unknown and no one has a crystal ball to predict what will happen next week or next month, but this is positive news. And let’s not forget about the US and the measure being taken there to boost growth….but that is a conversation for another column.
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