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Is the Era of Easy Money Over?

Wednesday, July 5th, 2017

With stock market indexes hovering again near all-time highs, concerns over a flagging bond market may be providing some ballast in near-term markets going forward. Last week showed the ECB, Bank of England and Bank of Canada all point toward strengthening economies indicating the end of quantitative easing on a global scale. In other words, the era of “easy money” be be over.

The contrasting fortunes of stocks and bonds this year, if not going back to the General Election back in November of last year, indicates the investment environment may be big on momentum but small on actual growth. Indeed, the promise of things like tax reform, an improved healthcare system, increased blue-collar employment and new infrastructure initiatives remain just that: a promise.

And now, with weakness and turbulence apparently in the rear view for some of the U.S.’s main allies and trading partners, a firming of foreign currencies and import/export costs may suggest economic activity is entering a new environment right now.

Consider also that two interest rate hikes have already taken place in the U.S. in 2017 — with perhaps not another one on the horizon until September, if not later, depending on economic data — and we may see a plateau of sorts in near-term market gains. As the longer-term bull market continues, attractive valuations are increasingly harder to find without a market selloff occurring.

That said, every one of our Zacks stock analysts expect a higher close to the S&P 500 by the end of the year, anywhere from +80 to +380 points, depending on the analyst. Main risks to these market gains range from issues in the housing market to negative headlines affecting President Trump to geopolitical concerns, most commonly associated with acutely aggressive countries like North Korea.

North Korea Launches Its Farthest ICBM Ever

Speaking of North Korea, today’s market may experience headwinds from this morning’s headline that the rogue nation may have the capability to strike Alaska with an intercontinental ballistic missile (ICBM), for the first time in its known history. For decades, the Kim dynasty has sabre-rattled against Western powers, most especially the U.S., and the realities that we may indeed be under attack one day from the totalitarian regime seem to have just gotten much closer.

Without a warm relationship between the Trump administration and leadership in China, this threat from North Korea may even be more worrisome. It has long been understood that the much smaller North Korea — reliant as it is on the much bigger China, the second-largest economy in the world — would be kept in check from aggressive measures against its perceived enemies like the U.S. Trump has recently tweeted, “So much for China working with us on North Korea…” (So much for super-power diplomacy, he might have added.)

President Trump, meantime, has headed to Europe to discuss UN Security later today, in addition to the president’s joining of the G20 summit later, which will bring Trump together once again with Russian President Putin. Again, Trump’s own aggressive demeanor in dealing with important world leaders would appear to have created an unforced headwind, especially as he sees himself in a position to seek favor from his NATO allies. Trump has lately indicated he fully backs the NATO alliance, but this has not always been his stated position.

Mark Vickery
Senior Editor

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