Stocks Will Remain Bouyant as Long as Global Quantitative Easing Remains in Play    

• Technically, there is little in the way of cumulative trading volume to keep the S&P 500 from rallying to the 1,200 level. Beyond that, however, it could get problematic, and a 10%~15% correction in October leading to a “Halloween” effect is a real possibility, as stocks continue to be buoyed by the most synchronized global quantitative easing in history.
• As there is often a multi-year lag between the cause (printing excess money) and the effect (inflation), inflation could remain tame for the next 12 months or so, but once the now widely expected growth starts kicking in, inflation is the inevitable outcome. For now, however, economies are still too reliant on action by central banks and governments, and still could slump once that support is taken away.
• Given a scenario of a) continued global quantitative easing, and b) continued structural weakness in USD, equity prices and commodities will remain buoyant despite the occasional correction. Smaller (higher beta) markets in Europe, the BRICs and Asia should continue to provide superior alpha. By global sectors, the best price movement continues to be in non-ferrous, precious metals and technology?implying investors are hedging USD and inflation risk while at the same time selectively investing in economic recovery through the technology sector. While any interim “knee jerk” USD rallies will continue to coincide with interim corrections in these investments, this is not the secular trend.
• The picture is however more mixed for the Nikkei 225. While Japanese equities have generally moved in line with the US-led rally in global equities, the upside remains stunted by continued JPY strength, continued weakness in external demand, renewed balance sheet concerns in some domestic sectors, and the weight of capital calls from major financial firms like Nomura Holdings. The new DPJ cabinet has essentially given currency traders the green light to test new highs in JPY.
• Thus while the short-term movement in commodities is pointing to yet another interim correction, we are still “buy on weakness” investors.

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