Central Banks To The Rescue!

| June 7, 2012 | 0 Comments

US/Eurozone flagsThat sound you hear is a huge, collective sigh of relief from investors after finally seeing a substantial rally in the market.  The Dow, S&P 500, and Nasdaq all jumped over 2% yesterday.

What’s more, the major indices have regained most of what they lost after last Friday’s disastrous jobs report and ensuing selloff.

So what caused the big move higher?

Well, we were certainly due for a climb after so many weeks of negativity.  Eventually, buyers step in when valuations reach attractive levels.

But that’s a longer-term scenario and doesn’t explain why yesterday was a particularly big day for bulls.  More likely, buyers came back in droves because of the increasing likelihood of central bank stimulus.

Specifically, it seems clear that the Fed and the ECB will step in to help their respective ailing economies.

In the Fed’s case, the most obvious scenario is an extension of Operation Twist.  In case you need a refresher, Operation Twist is a program meant to “twist” the interest rate curve by selling short-term Treasury bonds while buying long-term bonds.

The goal is to keep long rates low, which directly impacts key consumer rates such as mortgage rates.  Clearly, low mortgage rates are good for consumers… and should help increase spending.

On the other hand, the ECB is still in a position to lower overall rates. Europe’s key interest rate is still at 1%.  I’m not sure why they didn’t lower it yesterday, but at least they expressed a willingness to do so if economic conditions deteriorate any further.

At 1%, there’s still significant room for a rate cut.  And a half a point to a full point in terms of interest rates can be a big deal in a struggling economy.

Moreover, if Europe can avoid a meltdown, there’s a good chance the US will be just fine.  Even Warren Buffett believes the US will avoid another recession if Europe contains the debt crisis.

Here’s the thing…

What’s going on is basically what I’ve been saying all along.  Either the global economy is going to slowly recover on its own or the world’s central banks are going to step in with stimulus.

And we know how much the stock market loves stimulus.

Look, we may not be in the clear right now.  Volatility could be a regular feature of the market this summer.  However, the longer-term picture looks much better.  And with yesterday’s big rally, we might finally be putting May behind us.

Yours in profit,

Gordon Lewis

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Category: Breaking News, Investing in Penny Stocks

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