Stock markets surge to highest point in years: Can it last?

 

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The U.S. stock market is in blast-off mode, thanks to central bankers around the globe basically telling investors, "We got your back." The question now is whether stocks — now at levels not seen in almost five years — will keep shooting skyward or if the rally has already burned most of its rocket fuel?

Investors on Thursday got what they have been hoping for from the European Central Bank for years: a bond-buying plan intended to lower borrowing costs for debt-choked economies and give the 17-nation eurozone a chance to get its financial act together and get back on a growth track.

The result was a strong Wall Street rally that sent all three major U.S. stock indexes up about 2% and to their best levels since the 2008-09 financial crisis and since President Obama has been in office.

Sparking the rally was a confirmation that ECB President Mario Draghi is backing up his July pledge to do "whatever it takes" to keep the eurozone intact. "Draghi said he was committed to the euro, and he proved it," says Doug Cote, chief market strategist at ING Investment Management.

The ECB's move follows similar moves by the Federal Reserve since 2008 that have provided the economy and markets with a steriod-like jolt of liquidity. Draghi's bold step lowered investors' anxiety levels because it reduced the odds of an Armageddon-like outcome.

"The ECB's bond-buying plan," says Rex Macey, chief investment officer at Wilmington Trust, "takes out a lot of the fear factor."

The ECB support coincided with fresh U.S. data that suggest the recent soft patch is giving way to stronger growth, says Todd Salamone of Schaeffer's Investment Research. Thursday's report from payroll processor ADP showing a robust 201,000 private jobs were created in August jibed nicely with recent signs of a rebounding consumer, such as last month's strong retail and auto sales. Salamone says the strong data can keep the rally going. He cites underinvested money managers chasing performance as a potential catalyst.

But with lots of good news already priced into the market, the rally can't be sustained without upbeat incoming data and news, Macey says. Investors must still contend with the risk of a policy mistake by Congress that could cause a fiscal crisis in early 2013. Wall Street will get a read on whether the jobs market is picking up enough to warrant the optimism today when the August jobs report is released.