January 4, 5:00 pm EST
Stocks had a huge bounce today.
And it was driven by: 1) the central bank in China stepping in with an injection of over $100 billion in liquidity into the economy through a cut to the bank reserve requirement ration, and 2) the three most powerful central bankers in the world (over the past 10 years) sitting on stage together and massaging market sentiment on the path of interest rates.
We entered the year with the idea that the Fed would need to walk back on its rate hiking path this year (possibly even cutting, if the stock market environment persisted). And today, just days into the new year, we get the Fed Chair Powell, former Fed Chairs Yellen and Bernanke telling us that the Fed is essentially done of the year, unless things improve.
Remember, last year was the first since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). The culprit for such an anomaly: An overly aggressive Fed tightening cycle in a low inflation recovering economy. The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%). Now, we’re getting the Fed standing down, and committing to “responsiveness to the data and markets.”
Yellen voluntarily drew the comparison to today to early 2016 – where the Fed had to respond to sour markets that were beginning to feed into the economy.
In 2016, the oil price crash prompted a coordinated response by global central banks to avert another financial crisis. For the Fed’s part, they took two of the four projected rate hikes they had guided for 2016 off of the table (effectively easing). This coordinated easing from global policymakers put a bottom in stocks and oil in early 2016. Oil doubled by the end of the year. Stocks finished 2016 up 25% from the oil-price crash induced lows.
Here’s a look at the chart on oil today…
You can see this big trendline that represents the plunge from $76 has broken today.
And here’s a look at stocks …
We broke a big level today on the way up in the S&P 500 (2520) and it looks like a V-shaped recovery is underway, to take us back to where stocks broke down on December 3rd. That would be 12% from current levels.