As fully expected in our post last week, the US equity market resumed their bullish trend. The S&P500 moved up almost 1.2% last week; this point increase more than erased the previous week’s decline. Volatility declined as would be expected during a week when stock prices rose. But volume did not jump notably; this suggests that once again, markets are melting up rather than benefiting from any surge in new investor money.
Also supporting the current bullish bias was the release of several key economic reports. For example, retail sales—while disappointing on a month to month basis—are still registering solid year over year growth. The same applies to industrial production, which is also solidly positive on an annual basis. Until the key US economic trends turn down, it’s difficult to support a bearish argument for US stock markets.
That said, the rest of the world is suffering. Many major equity indices, in both developed and emerging markets, have turned south. China’s stock market, for example, has entered a bear market. The same applies to the currencies and to the corporate bonds of many of these same developed and emerging markets. Brazil’s Real has dropped to a multi-year low against the US dollar.
So it’s becoming more and more obvious that the US securities markets are staying strong in a global environment where many other markets are dropping significantly. The reason this is important is because divergences like this usually don’t last for long. This suggests that either the rest of the world’s markets should recover to join the already strong US markets……or that the US markets will start to fall and join the rest of the world’s weakening markets.
It’s almost certain that one or the other will happen….sometime over the next six to twelve months.