Bruce Bittles, Robert W. Baird & Co. Inc. chief investment strategist, wrote in his market notes yesterday that he expects the stock market to continue its rally into late August.
The Federal Reserve’s Federal Open Market Committee is meeting this week and it is widely believed the committee will keep existing policy in place. Chairman Ben Bernanke could modify QE3 and QE4, but Bittles said it is unlikely because of the fragile domestic and global economic conditions.
Any weaknesses that might develop in the equity markets in the near term will be temporary, he said. The markets were quiet last week, but the first three weeks of July were among the strongest in recent memory.
“Stocks entered the week overbought and overbelieved, which likely caused the stall. Second quarter earnings were mixed but the bias was to the upside. U.S. corporations have managed to maintain bottom line growth despite the struggle with revenues. Over the long term, earnings closely mirror GDP growth. Although earnings have played a supportive role this cycle, the gains have come from cost cutting, corporate buybacks and significantly lower financing costs that go straight to the bottom line,” Bittles wrote.
Fed policy is still bullish for stocks, and zero percent interest rates are expected to remain in effect until 2015. Because investor sentiment is still widely bullish, there is no trouble on the horizon for stocks, he said.
