A powerful rally lifted U.S. stocks to their highest levels since early 2008, but failed to brighten the mood of many market strategists, who question how long the advance can last given the global economy’s fundamental troubles.
The S&P 500 surged 2 per cent on Thursday, marking its biggest one-day gain since the start of August and taking it to its highest close in more than four-and-a-half years. The technology-heavy Nasdaq composite index did one better, rising to its highest close in nearly 12 years.
The European Central Bank provided the fuel for stock market gains around the world by announcing a bold plan to buy unlimited quantities of short-term government bonds from financially distressed euro zone countries in an effort to reduce pressure from the 17-member currency union’s ongoing sovereign-debt crisis.
While economists applauded the move, they expressed caution over whether it will have any meaningful impact on the crisis and the euro zone economy without an equally bold political response.
“The ECB is effectively trying to limit the risk that the financial crisis will escalate,” said Craig Alexander, chief economist at Toronto Dominion Bank. “It is not resolving the underlying problem.”
Nonetheless, markets were imbued with new confidence that central bankers are on the right track in dealing with a crisis that has roiled markets, off and on, for more than two years.
Germany’s DAX index rose 2.9 per cent, hitting its highest level in more than a year.
Bond yields of some of the euro zone’s most troubled nations fell sharply, reflecting greater confidence that countries like Spain and Italy will be able to finance their enormous deficits amid crumbling economic activity.
The impressive market reaction coincided with a dash of upbeat U.S. economic news, which pushed aside concerns that the U.S. economy could be sliding into recession.
Initial jobless claims for the period ended last week fell slightly and the ADP report on private sector employment for August showed gains of 201,000, easily surpassing expectations. Also, the ISM non-manufacturing index for August rose to 53.7, hitting a three-month high.
But the good news was not enough to change the cautious sentiment that has prevailed among many professional investors in recent months – a period defined by extraordinarily low trading volume, an indication that many buyers are remaining on the sidelines.
“Whenever there has been quantitative easing or monetary stimulus, markets have had a good rally. And it doesn’t seem to be any different this time,” said Ian Nakamoto, director of research at investment firm MacDougall, MacDougall & MacTier.
Even though the S&P 500 rose to multi-year highs, it has been struggling for more than a year through a series of rallies and corrections. Over the past 16 months, it has risen just 5 per cent overall.
The problem is the global economy. The U.S. economy grew just 1.7 per cent in the second quarter, at an annualized pace, which is not enough to make any big improvement in the country’s unemployment rate.
China’s slowing economy is also a concern, given its importance to global growth.
And even as it announced its bond-buying plans, the ECB slashed its economic projections for the euro zone for this year and next. It now sees the economy shrinking between 0.2 per cent and 0.6 per cent this year, with barely a heartbeat expected for 2013.
“The fundamental backdrop is not really supportive of this rally,” said Kien Lim, associate strategist for RBC Dominion Securities Inc.
“As long as central bankers continue to deliver on policy, then perhaps the market has legs to run. But if they disappoint, then people will probably focus more on those fundamentals.”