US Markets: S&P 500 Sets a New All-Time High, Earnings to Dictate the Direction from Here plus the Feds Now Has a New Tool for Stimulating the Economy

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The S&P 500 (SPX) set a new all-time high of 2141.30 on Monday after a 15-month wait. This comes as investors became more positive about the outlook of the US economy amidst persistent worries about the growth of economies across the globe.

Seven out of the ten major sectors indexed in S&P 500 went higher during Monday’s trading session.

The NASDAQ Composite (.IXIC) also rose during Monday’s trading session to over 5,000 – its highest level in 2016.

The first of the positive economic news came on Friday, July 8 when the US announced impressive employment data for June, to close the second quarter on a positive note, following a weak first quarter.

US data revealed that employers across the country added 287,000 jobs in June, compared to the paltry 11,000 jobs added the prior month. That was the largest Job gain in eight months. Analysts expected only a 180,000-job addition.

Moreover, With the Fed delaying in raising the benchmark interest rate, analysts believe that investors are rushing to stocks to get the yields that the traditionally safer bonds don’t offer currently.

Low bond yields send investors to equities

Analysts are also saying that the fact that bond yields are currently low is driving investors into equities investors thereby pushing up demands hence, contributing to rising equity prices as seen with the S&P 500.

The US 10-Year Treasury note still lurks around its historic low region in the aftermath of the Britain’s vote to exit the EU.

Earnings would decide the performance of equities over the next few weeks

Alocoa Inc. (AA) kicked off the earnings season after close of market on Monday with an earnings beat. And analysts believe that the consensus of earnings over the next few weeks will decide if the current market rally will last.

Wall Street is not expecting positive vibes from corporate America during this earnings season, though. The consensus is that S&P 500 earnings for the second quarter will be down 5.2% relative to the prior-year quarter.

Beyond earnings figures, though, comments from company executives on how Britain’s exit from the European Union will affect their respective business will also be key to the direction in which the market will move.

The weak pound and the strong dollar, fueled by foreign exchange movement due to the Brexit vote, already make it a bit more profitable for Americans to do business in the UK, and there’s quite a bit of money moving from US to UK.

And with the central bank of England weighing the possibilities of an interest rate cut, the outlook of doing business in the UK in the near-term could improve significantly.

Communication as an economic policy tool?

A new research article published by the San Francisco Federal Reserve on Monday suggests that the Fed may have a new tool at hand to put the economy in a balanced state.

The report analyzed how rates on bonds with variable maturity dates responded to communication surprises from the Fed before and after the zero-bound interest rate period.  The zero-bound period refers to the time during which interest rate was near zero before it was raised a little bit in 2015.

The researchers found that, even though the Fed kept interest rate levels around record low, longer yield bonds “continued to respond to communication surprises in a way that is basically unchanged relative to the” pre-zero-bound interest rate period.

This finding brought about a conclusion that the Fed could employ communication as a new policy tool to invigorate the economy when a recession comes around again.

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