Why Are Stocks Moving Higher?

10/28/2011 11:30 am EST

Focus: MARKETS

Andrew Busch

Editor-in-Chief and Publisher, The Busch Update

BMO Capital Markets’ Andrew Busch shares his analysis of what was behind the recent market rally, and gives his thoughts on whether it can continue, in this exclusive interview with MoneyShow.com.

Andy, where are we headed here, do you think, for the rest of 2011?

Right, so let’s back up a little bit. Let’s go back to October 4, 2011, when we saw this enormous rally in the S&P—50 points in 50 minutes at the end of the day.

That came out right after the Financial Times released an article talking about bank recapitalization and the possibility of that occurring in Europe. That’s what just ignited this big rally, that’s part of the story.

For investors out there, just remember that Europe is one part of a story. The other parts are, we’ve seen better than expected economic growth—just over the last six weeks, really—in the United States. This was somewhat highlighted by the retail sales numbers that we had recently, and also better than expected housing starts.

Plus, of course, the United States has the easiest central bank on the planet, so that’s constructive and helpful.

Finally, we also had four emerging-market nations cut interest rates. We had Indonesia; we had Brazil, Turkey, and Israel. That’s very supportive for risk-on trading, where people buy equities, sell bonds, and sell the US dollar. That’s why we’ve seen a real big rally.

Going into this key end of October we’re looking for the Eurozone to have some kind of plan to recapitalize their banks and to abate the European debt crisis. The markets won’t necessarily like it overall, but they will realize that they’re actually doing something instead of sitting back and doing nothing—that’s very helpful.

Is this going to be something where they’re going to print money just like we did and flow it into the banks? Is that going to cause inflation? What’s going to be the end result of this then?

Right, so it’s not that simple. With Europe it never is, right?

Greece only has a really small amount of debt compared to the rest of Italy or Spain, so that’s what they’re trying to get at. They want to somewhat ring fence these two countries—the bigger core countries—and then at the same time simultaneously be able to recapitalize their banks to shield them to keep them functional, working, and then also to not have them so negatively impacted by a Greek default.

This is all just getting ready for the Greek default, so going forward I would say I think there is some resolution here. I think that’s what the markets have rallied on. I mean the fact that the Euro is still around $1.40 tells you the markets are fairly excited about this, instead of being at $1.20.

Finally, do you see the Euro being stronger then because of this?

Right, so basically if Europe gets their act together—I know that’s a big if—but if they do then you have to say, well, gosh, the dollar is way overvalued at these levels and stocks look really cheap to me. That’s kind of the way I look at it.

Yes, so I don’t think the Euro is going to disintegrate anytime soon. I think actually overall, the US dollar is bound to see a sell-off.

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