The market has had a strong rebound from a recent low point fuelled by uncertainty in the Middle East and the catastrophe in Japan. I have heard many investors and analysts say they don’t understand why or how the markets are moving higher with all the negative ge-political news from all over the world dominating the headlines. Why has this market rebounded so strongly when the news around the world is still looking so bad?
In my opinion, there are a few reasons why the markets in North America continue to power ahead. However, I believe all these reasons take a back seat to the fact that the market's momentum is clearly to the upside, and no matter what the negative news, market reaction is simple. It drops in value on the news, rationalizes what the possible negative effects of the negative news may be, accepts it and then powers ahead after a quick pause. It seems like bad news that causes the market to fall five per cent or so just refreshes the market for the next push.
The sectors of the North American stock markets that have led this rally over the last few years remain the same -- the major push has come from the energy, commodities, and precious and base metals sectors. This has not changed with gold and silver hitting new highs seemingly on a daily basis. The latest issues in the Middle East over the past month have also caused the price of oil to rise as well, pushing the oil sector share prices higher. We know that the Toronto Stock Exchange is dominated by energy and mining stocks, thus you have the answer as to what is moving the market higher in Canada.
When you have positive momentum in the markets, even negative news can be turned into a positive. Over the past few weeks we have been bombarded by negative news coming, yet instead of the market falling (it did initially but rebounded quickly), analysts have said that the rebuilding of Japan can possibly be a positive for the country and a positive for companies involved in that rebuilding. In my opinion, there are good and bad events happening in the world at any time, the stock market will move based on what investors choose to focus on at that time. It seems to be as simple as that.
In general, I believe the positive momentum on the major stock exchanges in Canada and in the U.S. is due to friendly economic and fiscal policies. Interest rates in both countries are near or at all-time lows, and tax levels have remained the same even with uncomfortable deficits. With interest so low, companies can refinance debt, borrow money at cheap rates to buy equipment and expand or make acquisitions, which we have seen more of lately. The U.S. government at the end of last year agreed to extend all tax cuts from the Bush administration for at least another year. This allows more money to stay in the hands of the consumer who then can continue to spend it. As we know, the U.S. consumer makes up the largest part of the American economy.
Therefore, even though there may be a lot of negative news in the world, the economic policies of both central banks in Canada and the U.S. seem to trump it all.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.