FED MESSAGE HAS BULLISH EFFECT ON BONDS AND GLOBAL STOCKS -- FALLING TREASURY YIELD PULLS DOLLAR LOWER AND COMMODITIES HIGHER -- UTILITIES, REITS, AND HOMEBUILDERS HAVE A STRONG WEEK -- MID AND SMALL CAP STOCKS HIT RECORD HIGHS -- S&P 500 MAY BE NEXT
FED EFFECT CONTINUES ON FRIDAY... After a brief pause on Thursday, global markets resumed the bullish tone that started after the Fed's dovish statement on Wednesday. With the Fed scaling back on its plans to hike short-term rates later this year, markets acted accordingly. Treasury yields plunged to the lowest level in more than a month (see Chart 1). That pushed the dollar lower and contributed to a bounce in commodity markets. The drop in yields also gave a big boost to dividend paying stocks like utilities and REITs which had a very strong week (Chart 2). Homebuilders were also strong on the prospect for lower mortgage rates (Chart 3). Small and midcap stock indexes in the U.S. hit new highs, while the large cap Dow Industrials and S&P 500 neared their old highs. Even stronger gains were seen overseas.
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Chart 1
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Chart 2
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Chart 3
EAFE ISHARES REACH NEW SIX-MONTH HIGH ... Chart 4 shows EAFE iShares (EFA) ending the week at the highest level since last September. That jump reflected sharp gains in foreign developed stocks in Europe, Australasia, and the Far East. It also benefited from this week's sharp drop in the U.S. dollar. [The EAFE is quoted in U.S. dollars]. Japan stocks hit another 15-year high. Germany hit another record high to lead eurozone stocks higher. Britain's FTSE 100 closed above 7000 for the first time. That helped push the Stoxx Europe 600 Index near a new record as well.
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Chart 4
DOW JONES STOXX EUROPE INDEX NEARS NEW RECORD... The monthly bars in Chart 6 show the Dow Jones STOXX Europe 600 Index ending the week above its 2007 peak at 400 and just shy of its 2000 intra-day peak at 405. An upside breakout appears imminent. Needless to say, that would confirm that European stocks are back in a secular bull market after 15 years of sideways action. An index of global stocks is close to a record high as well.
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Chart 5
FTSE ALL WORLD INDEX NEARS RECORD AS WELL ... The last time I showed the FTSE All World Index, it was bouncing off a rising support line extending back to last October. It is now close to testing overhead resistance extending back to last July at 286. A close above that level (which appears likely) would also put the global index at an all-time high. The monthly bars in Chart 7 show that the $FAW has also been struggling to stay above its 2007 intra-day peak near 280. A new high close this year would confirm that upside breakout and would put the global index at a new all-time high. That's obviously good for stocks in the U.S. which benefit from stronger global markets.
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Chart 6
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Chart 7
NASDAQ NEARS TEST OF 2000 HIGH... Another positive sign for U.S. stocks is the fact that the Nasdaq Composite Index reached the highest level in fifteen years on Friday, and is only 22 points from its all-time closing high reached in March 2000 at 5048 (see Chart 8). Technology leadership is usually a good sign for the U.S. market. With so many foreign markets at or close to record highs, odds are pretty good that the Nasdaq will eventually do the same.
