Market Perspective for November 21, 2014

Stocks enjoyed an uneventful week before pushing to new highs after China’s central bank cut interest rates on Friday. All the major indexes gained ground, with only the Russell 2000 Index failing to make a new high.

In the People’s Bank of China statement, they stated the decision to cut interest rates was not out of a desire to reverse the current policy of tight money. Some economists do view the move as driven by economic fundamentals in China, but the more likely catalyst for the move was Japan’s surprise expansion of quantitative easing in late October, which China immediately termed a threat. In the wake of China’s decision to cut interest rates, European Central Bank (ECB) President Mario Draghi also said the ECB was ready to do more. The result was a sharp drop in the euro that has pushed the U.S. Dollar Index to its highs. Markets were broadly higher though, as many investors did view the move as bullish for Chinese demand for natural resources, lifting the prices of many commodities, including oil.

In other central bank news, the Federal Reserve released the minutes of its last meeting, the one at which the decision was made to end quantitative easing. Although there wasn’t a lot of new information in the minutes, we did learn that Fed officials debated language related to when rate hikes will begin. Some officials argued for removing the statement that rates would remain low for a “considerable amount of time,” but they were rebuffed by those who feared the market might interpret that change as a signal that rate hikes would come much sooner. This debate shows the Fed leaning in a hawkish direction, with the debate centered on timing.

Retail stocks continued to outperform the broader market this week, although the jump in oil prices on Friday caused SPDR Retail (XRT) to lag behind SPDR S&P 500 (SPY). The sector was also hurt by Gap’s (GPS) earnings report, which included a reduction in its profit forecast for the year. The sector was however boosted by strong earnings reports from Best Buy (BBY), Home Depot (HD) and Lowe’s (LOW). With the beginning of the holiday shopping season, the retail sector should continue improving.

Stocks have been in a slow and steady uptrend since Japan’s decision to expand quantitative easing. With China potentially joining the currency devaluation game, another wave of liquidity could boost markets over the weeks ahead. The markets typically rally into the end of the year, but with major central banks in Japan, China and Europe looking to increase liquidity and/or weaken their currencies, stocks should have the wind at their back for the last six weeks of 2014.

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