The S&P 500 index rallied to a new all-time high, leading other US indexes higher, as investors added to the momentum created by Friday's unexpectedly robust jobs number.
By Vikram Rangala
Monday, July 11, 2016
An old trading floor rule called the Friday-Monday effect played out today as the US stock market extended the gains that closed last week. It began as a reaction to Friday's nonfarm payroll number and employment situation report, which surprised even the most optimistic analysts with 287,000 jobs created in June after a measly 38,000 in May.
The US markets, which had been in the doldrums after Brexit, saw a complete restoration of the $1.4 trillion in market value that had been lost after UK voters chose on June 23 to leave the European Union. The jobs numbers were encouraging in themselves as a sign of continued strength in the US economy.
At the same time, good jobs numbers can also make investors worry that the Fed will use them as justification for an interest rate increase. However, Friday's jobs number didn't raise expectations that the Fed will alter its rate hike plans. Whether investors balanced it out in their minds with May's awful number or simply didn't expect the Fed to base its decisions on a single month's outcome, they didn't seem bothered by speculation about Fed policy.
Two other central banks, however, did give investors some encouragement. Both the Bank of England and the European Central Bank committed to taking action to protect the global economy from the effects of Brexit. That news simply added to the markets list of reasons to be bullish today.
With a nearly two-percent increase in the S&P 500 since Friday, the momentum in stocks fueled even more buying. Wisely or not, some investors bought at or near the highs, not waiting for a pullback they feared may not come.
Such buying happens to some extent any time a market reaches highs. It's what leads to new highs, after all. In part it's the desire not to be left out of any larger move up.
It is also a product of the uncertainty created by Brexit. That uncertainty hasn't really changed. As a result, investors may be looking for other concrete factors to base their decisions on. One such reassurance came from Japan, where the victory by the ruling party means that country will move forward with stimulus, helping to keep the yen a reliable safe haven. The reassurances from the UK and EU central banks added to investor confidence.
And in a sense, even the post-Brexit uncertainty is a source of certainty for investors right now. As long as the situation remains shaky, the Fed is highly unlikely to add to market turbulence by raising rates. The CBOE Volatility Index (VIX), an index of market price volatility, has dropped two weeks in a row and fell 11 percent on Friday, as investors decided to focus on the positive: good job creation, protective central banks, and increasing political certainty.
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