Further Increase in Stock Prices Expected

Last week, stock prices on global exchanges rose sharply after the U.S. central bank announced a new program to inject an additional $600 billion of cheap money into the financial system.

On Wall Street, the Dow Jones strengthened by 2.9% last week, reaching 11,444 points, while the Nasdaq index also rose by the same percentage, reaching 2,578 points. The S&P 500 jumped by 3.6% to 1,225 points. All three indices reached their highest levels since the collapse of Lehman Brothers and the worst days of the financial crisis in early September 2008.

The strong rise in stock prices occurred mid-week after the U.S. central bank announced it would purchase government bonds worth $600 billion over the next eight months, or $75 billion per month, to maintain low interest rates and stimulate lending and faster economic growth. The value of the Fed’s program is slightly higher than the expected $500 billion. This has reduced uncertainty in the market, as indicated by the sharp decline in the VIX index of the Chicago Board Options Exchange, also known as the ‘fear index’.

“The decline in the VIX index shows that investors believe in the Fed’s strong support for the market, so we can likely expect further increases in stock prices,” says Jon Najarian, co-founder of the information website Optionmonster.com.

The market was also positively influenced by the success of the Republicans in the Congressional elections. The Republicans took control of the House of Representatives, but although they increased their number of seats in the Senate, the Democrats still maintained a narrow majority in that chamber. A divided Congress is considered positive for the capital market because, in such a situation, the passage of new laws and reforms, such as those recently in the financial and healthcare sectors, is more difficult, leading to less uncertainty regarding changes in business conditions.

Positive macroeconomic data also had a favorable impact on the market. In October, 151,000 new jobs were created in the U.S., marking the first increase in employment since May and double the expectations. The U.S. services sector strengthened in October more than expected, while industrial orders jumped by 2.1%, the highest in eight months.

“Given the easing of monetary policy and good seasonal indicators, the market could grow until December. From these levels, we could gain another 5%,” says Eric Teal, director at First Citizens Bankshares.

The Fed’s new program will increase the inflow of dollars into banks, which will lead to a decline in long-term interest rates and likely further pressure the value of the U.S. currency. Due to the weakening dollar, commodity prices are rising significantly. Therefore, last week, the commodity price index reached its highest level in two years.

This, in turn, positively affected the mining and energy sectors, which were among the biggest winners last week.

Stock prices in the retail sector also rose after several retail chains reported better-than-expected sales results in October, indicating strong holiday spending. The financial sector was also among the biggest winners, thanks to news that the Fed might soon allow financially strong banks to increase dividends.

The good mood in the market is also reflected in the increase in trading volume. On Wall Street, the American Stock Exchange, and Nasdaq, the number of shares changing hands in recent days ranged between 9.4 and 10.4 billion, while the average daily turnover this year has been 8.73 billion.

Stock prices also rose sharply on European exchanges last week. The London FTSE index jumped 3.52% to 5,875 points, while the Frankfurt DAX rose 2.31% to 6,754 points, and the Paris CAC increased by 2.16% to 3,916 points. On the Tokyo Stock Exchange, the Nikkei index rose by 4.6% last week to 9,625 points. (H)