Why Dow 16,000 is back in play
A shell-shocked Wall Street responds to no taper from the Fed. Barclays calls for a 5% stock market rally by year end.
It's been quite a week.
All because the Federal Reserve, which had been sending signals for months that it was about to pull back on its $85 billion-a-month long-term bond buying stimulus, decided at the last minute to change its mind. There would be no "taper" after all. Wall Street wasn't expecting that, with Bank of America Merrill Lynch, as I highlighted in a recent column, the only major brokerage warning that the Fed would wait.
While stocks are giving back some of their post-Fed gains, according to Barclays Capital, the Fed's backtracking has set the stage for big end-of-year rally. Here's why.
Analysts, generally, are trying to regain their bearings.
Credit Suisse wasn't pleased that, after months of apparently trying to prepare everyone for an-ever-so-slight reduction in the pace of new stimulus (the taper wouldn't have represented a tightening of policy, just a slowing) the Fed pulled the rug out from everyone. Not only will this make the job of actually tightening that much harder (probably won't happen until Bernanke's term ends in January) but it rattles the market's ability to trust what Fed officials imply.
They are also bothered by what they see as rather thin evidence to hold off on the taper. In their words:
"In the spirit of 'watch what they do, not what they say,' it’s hard to know now what to make of the repeated and nearly universal references by Fed officials to taper. When push came to shove, those words didn’t carry the day. It seems that relatively small shortfalls in hard data like jobs, retail sales, and housing activity -- combined with a rise in mortgage rates -- deflected the Fed from action that otherwise had been elaborately telegraphed."
Just look at the chart above. Hard to see the jobs shortfall that spooked the Fed, isn't it?
Overall, in fact, the economic data has been quite strong recently. You can see this in the Citigroup Economic Surprise Index below, which measures how the data is coming in vs. analyst expectations. When the yellow line is high, as it is now, it means the data is exceeding expectations consistently.
The combination of better economic data (led by a turnaround in global manufacturing activity) and a Fed willing to keep the cheap money stimulus flowing is a potent one. Thus, the Barclays call from equity strategist Barry Knapp.
Knapp expects that, with the worries over the budget fight in Washington and relatively low inflation, the Fed won't taper until its December policy meeting. Furthermore, since the market has already digested the original shock to the idea of tapering overall (the May-June market swoon), he believes the lead-up to the actual taper in November and December will both be largely ignored by investors as well as overrun by the positive seasonality the market enjoys toward the end of the year.
Thus, with the Fed's focus on keeping rates "lower for longer" and maintaining its bond buying stimulus as long as possible, Knapp believes 1,800 on the S&P 500 ($SPX) is a reasonable valuation midpoint for the end of the year (a 5% gain from here), with a greater risk that this forecast is too conservative rather than too optimistic.
That would put the Dow Jones Industrial Average ($DJI) well above 16,000.
Of course, assuming this all works as planned, as I warned in a recent column and video segment, faster economic growth will encourage inflationary pressures to build. Sometime in 2014, the Fed will be confronted with price pressures it can no longer ignore and potentially be forced to start raising short-term interest rates.
When that happens, all bets are off. But for now, as long as the debt ceiling fight in Washington doesn't go nuclear, stocks could very well experience another cheap money melt-up.
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Anthony, you have the worst luck in the world. Once again, your two day old story hits the headlines at the worst possible time. I'm sorry man.
What's the DOLLAR Worth:
It bothered me for the past few months as to the rise of the Stock Market and all of the predictions as to the increase in the market and the market shares until I did some research of my own.
The Dollar has declined from $1.00 in 1913 to buy a $1.00's worth of Goods or Services
To Dollar in 2009 is worth 4.6 cents
In 1927 there were 15,000 millionaires
In 1930 there were 513 millionaires
In 2009 there were 11 million millionaires
Why? Cheap money.
The Market as we see it has escalated to great heights and has created wealth beyond our wildest imaginations.
But the reality is that the Market has in fact "Devalued" itself over time due to the value of our "Dollar".
So, To say the market will climb to a staggering height of 16,000 points by 2016 only shows the devaluation of the American Currency and only that.
The stocks aren't worth any more, inflation demands this increase.. Like a loaf of bread costing 10cents in 1968, now we are seeing the same effect on the Stock Market.
INFLATION--LESS FOR MORE So, Mr. Mirhaydari I fail to see the value of this article
Wrong Way Tony scores again!!!!!
By the way Tony. The budget fight went nuclear this afternoon.
Anthony is wrong, wrong, wrong again. When he is a bear the market goes up. When he is a bull the market goes down. There are charts to justify any point, side of the market you want to take. Today he is bullish for the near term, where as all summer he was a bear, based on his charts and "analysis" of the US and global economy. Did the charts and economy change that much in 2 months? My mother always said. "liars figure and figures lie".
The stock market will move in the exact opposite direction than what the general consensus will dictate.
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The S&P 500 manages to keep a deathgrip on 2,000, but key areas of the market are already buckling under pressure.
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