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After rallying sharply in October on strong third quarter corporate earnings reports, stock markets dropped in November as the end of the reporting period focused investor attention back on Europe again, where the sovereign debt problems have raised concerns about economic growth and the financial system. Stocks however, did rally sharply on the last day of November as a series of economic initiatives boosted confidence that governments and central banks are beginning to seriously address the problems in the region. Markets were also buoyed by the news that China’s central bank would reduce the reserve requirement for banks by 0.5%, indicating a ‘loosening’ of monetary policy. Following months of declining economic activity, the People’s Bank of China said it will lower the reserve requirement ratio for the country’s largest banks for the first time in three years to ease constraints on lending and replenish liquidity in the country’s banking system. The move to ease the flow of money in China represents a dramatic and important shift away from the central bank’s post credit-crisis tightening campaign.
Finally, recent U.S. economic reports were much stronger than expected with the ADP payroll data, home sales, Chicago ISM and the Conference Board’s consumer confidence index all surging well beyond expectations. With that ‘trifecta’ of good market-related news, stocks surged higher with the largest single-day move since early August. Similar sharp recoveries in August and October failed to follow through so it has yet to be seen whether this most recent run to the upside (the strongest 3-day gains for the U.S. market since 2009) will turn into the often-occurring “Santa Claus” rally or not.
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