Three key factors to consider as the S&P 500 hits 2,000

John Hintz, CFA
John Hintz, CFA

With the S&P at approximately 2,000 and approaching all-time highs there are some key factors to be aware of that will be major determinants of whether the bull market cycle continues.

Factor 1:  Federal Reserve Monetary Policy – On September 17th, the Federal Reserve is going to release their most recent decision on interest rates.  While no one is expecting the Fed to raise interest rates today, the consensus market expectations is that the Fed will raise interest rates mid-year 2015.  Any hint from the Fed’s press release or Janet Yellen’s comments at a scheduled press conference this afternoon that the Fed might act earlier to move interest rates higher will likely be a negative headwind for the market.  A dovish Fed has been a major driver of this bull market and any sign the Fed is becoming more hawkish will be a hurdle the market will have to surpass.

Factor 2:  European Economic Growth – Recently we have been seeing a significant slowdown in Europe.  For example, Italy recently released second quarter 2014 GDP numbers that indicated it was in a recession again.  This is the third time Italy has been in a recession since 2008.  Germany, the largest economy in Europe, reported a negative GDP figure for the second quarter of 2014, which took the market by surprise.  France, the second largest economy in Europe, reported flat growth in its 2014 second quarter GDP release.  Shortly after these negative European economic statistics were released, the European Central Bank lowered interest rates and introduced a form of quantitative easing.  It is imperative that Europe gains traction and starts posting stronger growth economic figures.  Current stock market prices are not pricing in a triple dip recession in Europe and this could be a stumbling block to further market appreciation.

Factor 3:  China Does Not Experience a Hard Landing – Recent economic data out of China has indicated a sharp slowdown in activity within China.  China is always a major contributor to global GDP growth and if China does not meet its economic goals it would negatively impact not only China, but also the overall global economy.  On September 16th, China provided $81.4 billion of liquidity to the country’s five biggest banks as Premier Li Keqiang stepped up stimulus to support economic growth.  This is like “printing money” as base money is created.  The goal of the action is to encourage more lending to businesses from the big banks to stimulate economic activity.

Thus, while the bull market remains intact at this juncture, there are some concerns to be aware of.  It will be important to monitor monetary policy around the globe to ensure it is fostering economic growth.  If recent past recessions taught us anything, it is that if one major economic region catches a severe cold, it can be contagious to other regions of the world.  Thus, we need an overall healthy global economy to see this bull market continue.  Winch Financial will continue to closely follow these factors and position portfolio’s to take advantage of the economic and market outlook.