Tags: bubble | boom | stock | market

European Central Bank Can Save the Stock Market

By    |   Friday, 23 Jan 2015 07:58 AM

The big story in the past week has been the European Central Bank (ECB) decision to buy bonds. Investors have seen this story before. The Federal Reserve bought large amounts of bonds for six years and the stock market moved consistently higher as the Fed bought bonds.

In the markets, history never repeats exactly, but we do generally see similar price patterns when the circumstances are similar. In a bubble, for example, we see a parabolic up move as greed replaces rational thought in investors' minds. Then we see a collapse when we run out of buyers. The exact details vary in each bubble, but the same general pattern has unfolded since Dutch traders bid up tulip bulb prices in 1636 — boom followed by bust.

We are about to see a boom unfold in European financial markets. Quantitative easing doesn't really seem to increase economic growth based on the Fed's experience, but it does lead to lower interest rates and higher stock prices. It won't be a straight line up, but we should expect European stocks to be higher next year than they are now as the markets absorb 720 billion euros in the next 12 months.

Some of those euros will help boost U.S. stock prices as well because all of the money created by the ECB will need to find a place to go. As long as at least one of the world's largest central banks is easing, stock markets will be bullish. In all likelihood, this bull market will end in a bubble and we are far from the bubble stage in global stock markets.

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MichaelCarr
The big story in the past week has been the European Central Bank (ECB) decision to buy bonds. Investors have seen this story before. The Federal Reserve bought large amounts of bonds for six years and the stock market moved consistently higher as the Fed bought bonds.
bubble, boom, stock, market
268
2015-58-23
Friday, 23 Jan 2015 07:58 AM
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