Market Matters…
|
Market/Index |
Year Close (2012) |
Qtr Close (03/31/13) |
Previous Week (06/14/13) |
Current Week (06/21/13) |
YTD Change |
|
Dow Jones Industrial |
13,104.14 |
14,578.54 |
15,070.18 |
14,799.40 |
12.94% |
|
NASDAQ |
3,019.51 |
3,267.52 |
3,423.56 |
3,357.25 |
11.19% |
|
S&P 500 |
1,426.19 |
1,569.19 |
1,626.73 |
1,592.43 |
11.66% |
|
Russell 2000 |
849.35 |
951.54 |
981.38 |
963.68 |
13.46% |
|
Global Dow |
1,995.96 |
2,110.73 |
2,149.37 |
2,086.18 |
4.52% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
1.76% |
1.85% |
2.13% |
2.51% |
75 bps |
What is the Fed actually saying? The economy is recovering; the labor market is improving; short-term interest rates should remain low until at least 2015; the bond buying program will continue in its current form; any “winding down” (tapering) of purchases will be contingent on steady growth; the policymakers would be prepared to ramp up buying if conditions warrant. What have many investors been hearing/thinking? The Fed will be ending its much-needed stimulus sooner than later; the Fed is over-estimating the growth of the economy; by ending the stimulus too soon, growth and the recovery will be halted; bonds will plunge as a reduction in Fed purchases means lower demand; stocks will plunge as businesses struggle in the advent of a weaker economy; global markets will be negatively impacted as China’s manufacturing, for example, contracts further from diminished trade activity.
Somewhere, there remains a disconnect between Bernanke’s message and the one investors are hearing. Any easing of Fed programs should imply that the economy is now strong enough to advance without the need for continued artificial support. Generally, positive sentiment about the economy and business environment from policymakers should translate into bullish sentiment for equities. In this case, however, just the opposite is occurring and investors are running scared (for the time being).
Much of the biz news of the week was buried under the hysteria surrounding the Fed policy meeting. In a nutshell, politicos are beginning to tackle legislation that ultimately may mean the end of Fannie Mae and Freddie Mac as private entities take a more active role in the mortgage lending process with a “public guarantor” overseeing catastrophic losses (like the FDIC does for bank deposits). The G8 plans to focus on global tax evasion and avoidance as companies seek safe-haven countries with more lucrative tax law. As a byproduct, domestic companies hope such discussions lead to a reduction in the high 35% US corporate tax rate. Activist investor Carl Icahn disclosed a larger stake in Dell as he tries to maximize the tender for any privatization transaction. Dish Network is no longer pursuing Sprint and Japan’s Softbank looks to be the winner. Microsoft’s buyout talks with Nokia appear to have broken down. FedEx posted better-than-expected earnings, but offered a disappointing forecast for the full year.
Sell the rumors…sell the facts. For a few weeks, investors have speculated that the policy meeting could lay the groundwork for an end to certain stimulus; they sold in advance of the meeting. While no such moves were announced, the accompanying statement expressed optimism about the economic recovery which led to greater speculation that bond buying would be reduced soon and more selling ensued. Stocks fell because investors apparently believe the economy cannot grow without the Fed’s support. The Dow suffered its worst loss of the year and the biggest two-day pullback since November 2011 (a bit of profit-taking perhaps?). Bonds fell (yields rose close to two-year highs) because the end of the purchases (whenever that may be) means less demand for fixed income. Time to take a deep breath and reassess.
Economic Calendar
|
Date |
Release |
Comments |
|
June 18 |
Housing Starts (05/13) |
Solid activity in multi-family building |
|
CPI (05/13) |
Slight increase still below Fed’s target |
|
|
June 19 |
Fed Policy Meeting |
Upgraded assessment of the economic recovery |
|
June 20 |
Jobless Claims (06/15/13) |
Increase in claims still points to job growth |
|
Existing Home Sales (05/13) |
Highest level since late 2009 |
|
|
Leading Eco. Indicators (05/13) |
Slight uptick seen as cautious for next quarter |
|
|
The Week Ahead |
||
|
June 25 |
Durable Goods Orders (05/13) |
|
|
Consumer Confidence (06/13) |
||
|
New Home Sales ()5/13) |
||
|
June 26 |
GDP (1st quarter – revised) |
|
|
June 27 |
Jobless Claims (06/22/13) |
|
|
Personal Income/Spending (05/13) |
Investors reacted (overreacted) this week despite the seemingly positive vibes the Fed left about the economy. The policymakers upgraded their assessment of the recovery, downwardly revised their forecasts for unemployment (6.5% to 6.8% by late-2014), and lowered their immediate outlook for inflation (though foresee it increasing toward its targeted 2% by the end of next year). They don’t expect to increase rates (fed fund) until 2015 and made no changes to the bond buying program. These days, Bernanke must be walking on pins and needles as each comment he makes is over-analyzed and markets react to specific wordings or any perceived emphasis. For his part, Prez Obama has hinted that Bernanke’s days may be numbered as Fed Chair, saying that he has already stayed on “a lot longer than he wanted or he was supposed to.” (Probably can’t come soon enough for Dr. B.)
Housing remains the chief catalyst for the economy these days as housing starts surged 6.8% and stands almost 30% higher than last year’s levels. A key home builders confidence index jumped to the highest level since the mid-2000s real estate boom. Existing home sales rose 4.2% and the median price is 15% above its June 2012 level. In other news, consumer prices increased slightly though still stands well below the Fed’s targeted rate. Leading economic indicators also rose a bit though some analysts are still concerned that the impact of sequester (automatic budget spending cuts) could hurt economic growth in the months to come.
While most analysts are closely dissecting anything and everything from the Fed these days, many are also closely monitoring developments in China. A preliminary purchasing managers index showed sector contraction in June as the reading fell to its lowest level in nine months. China is also suffering a cash squeeze which is threatening the broader economy with higher rates and tighter lending terms. In Europe, Germany’s Bundesbank reported that its economy should experience solid growth in the second quarter. Greece jumped into the headlines again as its moderate Democratic Left party withdrew from its coalition government, making future financial (bailout) moves more challenging. Finally, while Bernanke is looking forward to relaxing in his twilight days soon, his European Central Bank counterpart Draghi remains in the limelight. This week he reiterated his intent to monitor the Eurozone situation closely and act with lower interest rates or non-traditional stimulus if the need arises (sound familiar?).
On the Horizon… So how will Bernanke and his counterparts react to the public’s interpretation to this week’s policy statement? Every comment will be dissected ever-so-closely for any perceived hidden meanings. While some investors remain concerned about the markets in a “bond tapering” scenario, others may wake up Monday, realize the Fed is optimistic about the state of affairs, and seek out value in the carnage of the past few days (wishful thinking?).
© Brounes & Associates
