Why Stocks Are Poised To Push Higher

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Includes: DIA, IWM, QQQ, SPY, VTI
by: Markos Kaminis
Summary

Stocks are poised to push higher once pent-up demand for equities is freed to flow when Fed uncertainty is cleared.

The employee savings and investment system in corporate America serves as a money machine steadily flowing capital into investments.

The turn of the fiscal year for many institutional fund managers means these investors have clean performance slates just as many of their favorite stocks are on sale.

The best catalyst for a stock buying spree would be a turn in China, improvement in the U.S. energy sector or otherwise fueled robust U.S. economic growth.

Best catalysts being absent, the Federal Reserve is unlikely to raise interest rates next week. The clearance of risk and uncertainty should allow pent-up capital to flow freely into stocks.

As we near another Federal Reserve push-forward of rate action, stocks are poised to push higher. Given the inclination of the American investment machine to put capital to use in equities and the recent reloading of institutional investor capital flow gun barrels, investor appetite is primed. All we need now is a turn in China or otherwise fueled U.S. economic growth; or perhaps a little helping hand from the Fed again to give stocks that old lift they recently lost. I'm expecting the Fed to push their first rate hike forward again when they meet next week. I anticipate the market will look past any economic warning signal some pundits will surely read into Fed inaction. Rather, Fed inaction will be seen as simply a temporary and sensible maneuver to hold us over until the economic environment is more certain. While various risks remain, and black swans linger, I anticipate stocks will push their way higher, and see the S&P 500 Index (NYSE: SPY) moving to 2080 or higher in the near-term and toward its high watermark by late November.

The American Money Machine

Capitalism in corporate America funnels worker funds into retirement investment accounts that help to fuel long-term equity growth. It's a work of wonder actually, and it serves to keep the system fueled to help us push through tough times. Lost decades like that experienced by Japan seem less possible for America for as long as the money machine is running. Mistakes are correctable when money keeps flowing into ideas and businesses and innovation is rewarded with a greater share.

Investors in America have been programmed into believing stocks will rise forever. The real risk of war or other derailing events are seen as tangential if not impossible, and historical returns of stocks are preached to would-be doomsday preppers turned sensible investors who march through temporary turmoil like battle worn warriors. This reliable flow of funds serves stocks long-term and helps to build up demand for them in times of instability when institutional investors keep that mountain of capital in less risky assets. Eventually, they get put back to use in all sorts of stocks.

Capital Flow Gun Barrels have been Reloaded

Recently, I advised followers of mine that the nascent turn in fiscal year for many institutional fund managers has effectively reloaded their gun barrels for new investment. With their performance slate rubbed clean now and with an entire year ahead of them to generate new gains, while noting much cheaper valuations in some of their favorite names today, institutional investors are showing signs of itchy trigger fingers. Stocks began their latest run-up at the start of October, on the mark even. Now all we need is a solid catalyst or reason to give investors to open the dam and let the mass of funds flow into stocks again.

1-Month Chart of SPDR S&P 500 (NYSE: SPY) at Seeking Alpha

Sector Security

Gains in October to 10/21/15

SPDR S&P 500

+5.4%

SPDR Dow Jones (NYSE: DIA)

+5.6%

PowerShares QQQ (NASDAQ: QQQ)

+5.7%

iShares Russell 2000 (NYSE: IWM)

+4.1%

Vanguard Total Stock Market (NYSE: VTI)

+5.0%

Tangible Catalysts are Curiously Inconsistent

We would hope to have a tangible catalyst for stocks to gain ground, like a return to higher growth in China, a restoration of more normalized energy prices for the ailing U.S. energy sector (and in turn manufacturing), or a general uptick toward 4% GDP growth in the U.S. Unfortunately, each of these would-be tangible catalysts is curiously inconsistent today. China just reported a questionable GDP growth estimate of 6.9% that, given a glance at various other data that is perhaps not as closely controlled by the government, seemed inconsistent to me. Though, other data reported recently on China trade was misinterpreted by the fast printing press in the U.S., and was actually good news in my view. In the U.S., an already ailing manufacturing sector, weighed down by the struggling energy sector (ordering less equipment), was joined in showing economic softness by last month's inadequate jobs data. Suddenly, the job growth that the Fed had been telling us might improve further and give it good reason to hike rates in October (despite global goblins) has disappeared.

Finally the Fed Catalyst

But one faltering foundation for stock growth gives birth to another fuel for it. Despite all the mumbo-jumbo you've been hearing about the investment community wanting the Fed to raise rates, the truth is, lower rates for longer supports a lower cost of capital for the corporations whose stocks we buy. So, cheaper money for them means a lower threshold for return on invested capital creation. In short for the laymen, that's good for stocks.

Some pundits and a few people who shouldn't really speak on television so much have indicated that stocks declined after the last Fed meeting because investors actually needed the Fed to act to clear uncertainty. While it is true that the clearing of uncertainty would have helped stocks higher, the Fed could have done so by not harping so much on October being a live meeting and describing how it could arrange a press conference to support a rate action if need be. The Fed needed to simply state its position and leave it at "we're data dependent" as always. Or it might have said that if things remained volatile globally, and if the dollar was still too strong because of it (impacting commodities like oil), then it would be less likely to act in the very near-term. But, the Fed, in I suppose an attempt to stay credible, focused on what it already knew about the U.S. economy and gave little credence to what could develop as a result of the immediate pressures against it. I believe the market sold off after the Chair's press conference because a Fed tightening action would be inappropriate now, even if it is to a still very low rate level.

Thus, when the Fed pushes rate action forward to December or beyond next week (and it had better or stocks will collapse), I expect the investment community will express relief and bid up stocks. All of that pent-up demand that has nudged investors and stocks up this far without much cause will have the clearance of October rate action risk to further free their hands. The Fed will put a spotlight on the latest soft employment data, but the economic data has been too mixed for the Fed to completely sour on the economic state of affairs. And, to be blunt, even if it did talk out loud about any economic concerns, I'm not sure smart money would be phased given institutions do a much better job of forecasting in-house. And on the other hand, if the Fed threatens about December as it did October, it will carry less weight.

I'm suggesting investors buy stocks today, and even into any trepidation-inspired weakness that may occur ahead of the Federal Open Market Committee (FOMC) meeting next week. I cover the market closely and so invite investors to follow my column here at Seeking Alpha for my regular reports.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.