European Central Bank action could drive German and U.S. markets higher in 2015
One of the most controversial events of our time has been the Federal Reserve’s program of Quantitative Easing. While the debate of its costs and benefits will likely rage for years to come, it is indisputable that the program has been a boost for US equity markets.
With the ECB (European Central Bank) now embarking on a similar program, we believe European equity markets are most likely headed higher – with the wealth effect impacting the most liquid markets first.
The markets clearly agree, as evidenced by the German DAX Index surging through 10,000, generating some powerful upside momentum in the process (A). While we do think this trend continues, investors should note that the DAX has gained 12% so far this year, and should manage their expectations accordingly.
Finally, it’s important to note that the DAX has been a good leading indicator for the S&P 500 the past few years. Last October was a good example, in that weakness was clearly evident in the DAX (lower high) prior to the decline in the S&P (B, C). Our point being, the breakout in the DAX now suggests that US equity markets may have more potential upside than many give them credit for.
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