Saturday, October 25, 2014

Stock Market: Return To Sanity

(Drivebycuriosity) - Last week the US stock market (represented by the S&P 500) rallied 4.1%, the best week since 2013, reports Bloomberg  (bloomberg). It looks like that the panic of the previous weeks is forgotten. I call this the return to sanity.

In the previous weeks the stock market had suffered some panic attacks. Some traders dumped anything which seemed risky, causing others to sell too, which lead to a snowball effect of more and more selling. The result were downward spiraling stock prices and culminated in steep declines from October 9th through October 15th. And there was the smell of a coming crash in the air.

The flight out of stocks was caused by speculation on a deteriorating global economy in spite of news of climbing Chinese exports, shrinking US jobless claims, cheaper energy and still extremely low interet rates. In my comment from last Saturday I wrote "panic attacks, as seen last Wednesday, in such a solid economic environment don´t make sense. Are the markets irrational?" (driveby).

Last wek we got the answer. The manufacturing indices in China & Europe rose, signaling that both regions are growing again and that the global economy is sounder than the worry warts want us to believe, and energy prices continued their healthy fall. 

The return to sanity also was encouraged by the positive start of the earnings season Q3 2014. According to Thomson Reuters "data through Friday morning, of 205 companies in the S&P 500 that have reported earnings, 69.8% have topped analysts' expectations, above the 63% rate since 1994" (reuters).

I reckon that the rally will continue and that the US stock market will finish the year with a significant gain.

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