A “January Effect” for Stocks in November
That’s from Louis Navellier’s Market 360 update last Thursday.
The update covers a lot of ground: the Fed’s new policy direction, inflation, a “January effect” for stocks (although it’s only November), earnings, the economic recovery and more.
Louis even gives a stock market forecast – in short, next week there could be a pullback from current highs, but that will actually be bullish.
In short, there are plenty of reasons for optimism these days.
I’ll pass it on to Louis for all those details.
What the latest Fed statements mean for the stock market
By Louis Navellier
In the face of rising inflation and a resurgent economy, the Federal Open Market Committee (FOMC) said on Wednesday that the Federal Reserve will begin scaling or “tapering” its recent bond-buying stimulus program this month, with a plan to to end the program completely in June.
The FOMC also said in its dovish statement that it would keep its target range for interest rates at 0.0% to 0.25% for the foreseeable future until the commission establishes maximum employment after layoffs related to pandemic yields and inflation on Monday. schedule is to be “moderately higher than 2% for some time.”
The committee decided to cut the monthly pace of net asset purchases by $10 billion for Treasury bills and $5 billion for mortgage-backed securities from government agencies, far less than many economists had expected.
That means the Fed will buy at least $70 billion in Treasury bills and at least $35 billion a month in mortgage-backed securities later this month. After that, starting in December, the Fed will buy at least $60 billion a month in Treasury bills and at least $30 billion a month in mortgage-backed securities.
The Fed is likely to continue cutting its purchases at a similar pace through June, but may change its schedule depending on the economic outlook.
Fed officials also admitted that inflation has risen, although the commission still views raising prices as mostly a passing phenomenon that doesn’t justify raising rates just yet.
“Demand and supply imbalances related to the pandemic and the reopening of the economy have contributed to significant price increases in some sectors,” the Fed said in its statement.
However, Federal Reserve chairman Jerome Powell noted in a news conference after the meeting that: “Our decision to begin phasing out our asset purchases today does not provide a direct signal regarding our interest rate policy. We continue to formulate a different and stricter test of the economic conditions that must be met before raising the federal fund rate.”
Shares soared on the news, with the Dow rising to a new all-time high of nearly 36,000 and both the S&P 500 and NASDAQ hitting new all-time highs late Wednesday.
I should add that the Fed is not alone in sticking to the stance to keep interest rates stable, as the Bank of England made the same decision this morning. The bank keeps the interest rate at 0.1%, while it expects inflation to rise to around 5% in the spring of 2022.
Overall, it’s very clear to me that Fed Chairman Powell wants to renew his job through President Biden and will strive not to rock the boat by keeping monetary policy super accommodative.
Taking advantage of an early “January effect”
What do the latest Fed statements mean for the stock market?
I wouldn’t say anything bad for fundamentally superior growth stocks with a smaller capitalization.
Below the surface of the market, we are in the midst of a very strong ‘January effect’. We experienced it a bit in October and now it is going faster and faster. That’s when year-end pension financing and annual gift giving tend to create forced buying pressures among smaller stocks, which are more sensitive to volume. As a result, they tend to bloom between November and May.
You can see this happening in the Russell 2000, which hit a new 52-week high on Monday, Tuesday and Wednesday and is up more than 7% in the past month.
And while some mega-cap stocks like Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) recently missed analyst earnings forecasts, as I wrote last week, they have recovered quite well in recent days.
More importantly, money does not leave the market. Instead, it flows into fundamentally superior smaller stocks, which is a very good sign.
Normally this is a time of year where we tend to lose breadth and strength, but I like the tone of the market.
I wouldn’t be surprised if the recent highs of the NASDAQ and S&P 500 take a break next week, but that’s okay too. Breaks refresh the market.
Meanwhile, the private sector is adding jobs with a flashy clip. ADP reported that 571,000 new jobs were added in October, crushing the Dow Jones estimate for 395,000 new jobs. The Federal Reserve Bank of Atlanta forecasts GDP growth of 8.2% in November, after slowing by an estimated 2.7% in October.
The bottom line is that with a strong economy and a recovering job environment, there isn’t much to derail the stock market as we enter the seasonally strong time of year and continue through January.
And let’s not forget the stunning third quarter earnings season that we are now experiencing. According to FactSet, the average earnings surprise in the S&P 500 so far is 10.3%, and the S&P 500 is on track to deliver average earnings growth of 36.6% and average revenue growth of 15.8%.
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