This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Draghi Drags S&P 500 Over 2000; Potential ECB Easing Boosts Dollar

Stocks in this article: SPY VOO IVV DIA IEF VGIT

NEW YORK (TheStreet) -- On this Labor Day, European Central Bank President Mario Draghi is doing the heavy lifting for the S&P 500  (SPY) . The ECB, not the Federal Reserve, is currently the central bank pushing investors into riskier bets in the U.S. stock and U.S. bond markets. The ECB currency countries constitute the largest economy in the world. A substantial bond buying program from the ECB will boost the dollar further along with the prices of all U.S. assets, including U.S. stocks.

The Federal Reserve's third bond buying program or quantitative easing (QE3) has been much maligned for driving investors into riskier sectors such as the stock market, SPY, (VOO) , (IVV)   and (DIA) . Yet, with the QE3 tapered out, guesses for the start of Fed funds interest rate hikes center around mid-2015. That means the Fed is starting to put the brakes on speculation. U.S. data on unemployment, corporate earnings and growth show a recovery in the U.S. in full swing, and stock prices are reflecting that. Thus, the Fed will be forced to raise rates sooner rather than later, which should be pushing up U.S. Treasury yields. But Treasury yields fell in August and Treasury bonds, (IEF) or (VGIT) , have been rallying. At the end of August, it was the potential of more monetary stimulus  from the ECB that was driving U.S. bond prices higher.

Read More: 10 Stocks George Soros Is Buying in 2014

Europe is still mired in a debt-deflationary spiral. Unemployment rates top out above 20% in many member states in the eurozone, and the overleveraged banks refuse to lend. Draghi hinted at more stimulus at the central banker's conference at Jackson Hole, Wyoming, recently. Draghi has talked tough before and failed to act. Nevertheless, it finally seems as though the ECB has no choice but to flood the world with euros to prevent deflation.

The last time the S&P 500 first crossed a thousand-point threshold was in 1998 during the Asian crises. In that year, the dollar rallied because of devaluations and weakness in Asia. Investors fled to U.S. markets for safety in 1998. Today, European investors are moving to the U.S. for better yields and have helped boost the S&P 500 index past the 2000-point mark in August. In 1998 as today, the Fed faced little inflationary pressure to raise rates at a faster clip, due in part to the dollar rally.

Read More: Will European Central Bank Ease Policy in Wake of Weak GDP?

German bonds are the only large safe haven in the euro currency zone. In the last week of August, German 10-year government bonds (bunds) yielded a measly 0.9% while investors could get more than 2.3% yield on the U.S. ten year Treasury. The low bund yields likely reflect both deflationary expectations in Europe and the anticipation of an ECB bond buying program. Either scenario justifies minuscule German bund yields. These low bund yields are spurring the flow of cash out of Europe. That flow makes the dollar more valuable and also moderates U.S. import price inflation. Both the reduced import price inflation pressure and increase in demand for Treasuries pushes down yields and boosts prices of U.S. government bonds. Thus, it seems for now, the U.S. Treasury market can defy the logic that interest rates have nowhere to go but up. At the time of publication, the author was long SPY and VOO.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs