Watch the Central Banks

The Dow Jones Industrial Average rose for the fifth straight week, but with a very small 0.12% advance.  The S&P 500 fell ever so slightly breaking it’s own four week advance.  Stocks were a bit more volatile this week than we have seen over the preceding four-week string of higher prices.

The IMF (International Monetary Fund) warned this week about slowing global growth.  With continued mixed messages over trade and concerns over slowing global growth, the rise in stock prices since the Christmas Eve low could ease bit.

Earning have been mixed, but look to be slightly better than expected while future earnings guidance doesn’t seem to be as bad as feared.  The Government shutdown has been garnering a lot of media attention.  While I don’t want to minimize the impact to government workers, my job is to look at the impact to financial markets.  Truth be told, there is little impact.  A recent study by LPL Financial found that over the last 18 shutdowns, the median change for the S&P 500 was 0.00%.  The study also found that the S&P 500 traded higher in 12 of the last 21 shutdowns.

While the financial media focuses on trade and shutdowns, I’ve been keeping my eye out on news coming out of the Central Banks around the world. China has taken additional policy measures to provide liquidity. Over concerns surrounding global growth, comments from the ECB (European Central Bank) reinforced the notion that they will may not be raising rates this fall, contrary to earlier expectations.  And last but not least, reports were floated that our very own Fed may be reviewing its quantitative tightening policy or QT.  The Fed has increased their balance sheet over the years in an effort to boost liquidity.  They have been working to normalize the balance sheet by letting bonds mature, which is a form of tightening similar to raising interest rates.

I continue to believe that central bank policy and measures to increase or decrease liquidity in the global financial system is an important development to watch.  Central banks have provided unprecedented liquidity since the great recession of 2008-2009.  A recent attempt to withdraw that liquidity has been met with volatility in the financial markets.