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Stimulating Upside for (Some) Stocks


The tug-of-war between weak economic data and stimulus from central banks is creating a polarized and unpredictable market. Here's how to navigate the next several months safely.

The latest employment report from the Bureau of Labor Statistics (or BLS) showed that there were only 103,000 private sector jobs created in the month of August, far below consensus market expectations for 142,000 jobs.

The jump in the four-week average of initial jobless claims to 375,000 suggests that jobs creation is likely to remain anemic into September.

Meanwhile, recent data indicates that Europe remains mired in a significant recession and the Chinese economy has slowed sharply over the past year. The latest reading on the HSBC Flash Purchasing Manager's Index (or PMI) for manufacturing in China was 47.6 in August; levels under 50 indicate a slowing manufacturing sector.

Despite this litany of troubling economic evidence, global stocks have soared. The S&P 500 hit its highest levels since early 2008 while Germany's DAX and the UK FTSE 100 are both within a few percent of touching four-year highs.

Strength in global equity markets in the face of weak economic data has been driven by yet another round of stimulus from central banks. On September 6, the European Central Bank (or ECB) and its president Mario Draghi ended weeks of speculation, announcing the Outright Monetary Transactions (or OMT), a program to purchase bonds issued by fiscally troubled EU governments in an effort to drive down yields.

Under the terms laid out by Draghi, countries that have applied for support from Europe's bailout funds-the European Stabilization Mechanism (or ESM) and its predecessor the European Financial Stabilization Facility (or EFSF)-and agreed to fiscal austerity conditions are eligible to receive support from the ECB.
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