Here in the U.S. quantitative easing (QE) by the Fed is now over. No more TARP funds to rescue ailing banks. No more bailouts for under-water homeowners. No more buying back U.S. bonds to keep interest rates low.
There is no doubt that quantitative easing (aka money printing) has helped drive the stock market to the record levels it sits at today. The market has been on QE steroids! The S&P 500 has recovered from the depths of despair (600’s) to its current level of over 2000.
All this begs the question: what is going to prop up the market now that all the stimulus is gone? Now other countries around the world have picked up the baton handed off by the U.S. and are creating their own forms of stimulus. While our Fed believes the U.S. economy can now stand on its own feet, other countries in the world are not so optimistic.
Japan came up with a plan to solve its economic woes by raising the national sales tax from 5% to 8%. Wrong Answer …
Sales plunged in response to the tax and the Japanese economy experienced a 7.6% decline in GDP. Japan’s Nikkei stock index also plunged, declining more than 12%.
There were plans for another sales tax hike in January that would have taken the rate from 8% to 10%. But after reporting a second quarter of negative GDP with a 1.6% drop, those plans have now been put on hold. Instead, Japan’s Prime Minister Shinzo Abe announced a massive round of quantitative easing, causing their market to rebound 14% off October lows.
Japan is also demographically challenged, selling more adult diapers than baby diapers. This is not good demographics for an economy, as its aging population is not generating enough tax income from young workers to support their aging population.
But Japan’s taking of the QE baton also helped lift our markets as well. While I am not rushing into investing in Japan given that the Japanese market has gone nowhere over the last 20 years, I was happy with the surprise announcement. A healthier trading partner is good for everyone!
Europe has been extremely reluctant to institute its own program of QE. Germany has significant influence and they are terrified of inflation given the hyper-inflation they suffered after both world wars. But Mario Draghi, head of the European Central Bank, has started a bond-buying program and indicated there is more stimulus on the way. Germany’s Merkel continues to be resistant to the idea, but Europe desperately needs to do something to stave off another recession, so it is also picking up the QE baton.
And now China is picking up the baton as well. While the U.S. just reported GDP of 3.8%, Japan reported -1.8%, and Europe a paltry 0.3%, China is concerned about their economy slowing to a 7.3% annual rate. Most countries would love to have China’s growth, but this level is relatively slow compared to recent years. In order to stimulate growth, China cut their interest rates from 6% to 5.6%. And they obviously have a lot further to go, if needed.
It is hard to still not like stocks given all the quantitative easing flooding world markets with capital. I have been long the U.S. stock market for the last 5 and one half years. I continue to avoid Japan, but I am keeping an eye on Europe for opportunities there. And the Chinese market is starting to look interesting again. It has had many false starts over the years however, so I am just “nibbling” there. The Chinese “A” share ETF, (NYSEARCA:ASHR) is looking very interesting.
If there is one lesson learned from the U.S. experiment with QE, it drives stock markets higher. For now, the U.S. market continues to be the place to be. Nine of the top 10 indexes of the 77 I track on a daily basis are U.S. stock related!
Top Ten Indexes This Week
Data from Best Stocks Now app
Even with the absence of domestic QE, other countries are now carrying the QE baton and driving our markets higher. There may be a change in the balance of power next year however. With QE ending here and cranking up elsewhere, I will be keeping my eyes on Japan, Europe, and China as a source of future opportunities.
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