ECB Ready To Act
In a familiar theme of words and little in the way of action, the head of
the European Central Bank was jawboning again Monday. From The
Wall Street Journal:
"The European Central Bank is willing to take additional easing steps
including purchases of government bonds if needed to keep inflation from
staying too low for too long, ECB President Mario Draghi said Monday. Mr.
Draghi's remarks, in testimony to the European Parliament, underscored
the central bank's commitment to expand its balance sheet--the value of
assets it holds--and if necessary widen its stimulus efforts to ensure
that inflation rises back to the ECB's target of just below 2%."
The theme of ongoing "easy money" ties in nicely with what history says about
the current stock rally in the United States.
Rare And Unprecedented
Since numerous rare occurrences,
including the massive V-type rally in stocks, could skew the current landscape
from a historical perspective, it is important we remain open to all outcomes
(bullish, bearish, and sideways). However, it is also prudent to ask:
Can we learn anything from similar rallies in the last 10 years?
Weather Analogy
Just as meteorological conditions shift slowly over time between the middle
of summer and the dead of winter, markets experience observable changes as
a bottom is formed after a correction and during the subsequent rally. The
market was weak (temperature of roughly 13 degrees) just prior to the October
15 low. Since then, conditions have improved relative to the market's profile
(temperature of roughly 83 on November 7, 2014). How has the market performed
in the past after moving from a profile of 13 to 83? That question is explored
in this week's video.
The table below is described in the video above, along with charts showing
numerous examples from recent history.
Investment Implications - The Weight Of The Evidence
Regular readers know our approach frowns upon forecasting and instead allocates
based on the facts we have in hand. Therefore, the exercise above is simply
about exploring the range of possibilities based on recent history. The market
may go sideways or it may go down, but history tells us upside is also a realistic
outcome in the months ahead. Based on the evidence we have in hand, our market
model is calling for a heavy weight to equities (SPY), complemented by a modest
stake in bonds (TLT). If the bulls can carry the market over the 2043 to 2046
level this week, the evidence may call for another incremental add to our stock
ETF holdings.
ECB image Adam
Baker Flickr
