Financial Market UpdateStrategicPoint of View®
August 16, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Economic data, in general, was weaker. Productivity, the trade balance, jobless claims and retail sales all came in well below expectations. In particular, the trade deficit was the worst since 1992 while productivity declined almost 1%. Core CPI confirmed continued disinflation. Although consumer sentiment edged up, it remained depressed. On a positive note, Germany’s economic output in the second quarter rose 2.2% (9.1% annualized rate), boosting the eurozone’s economy and the impression that the EU was putting some of its problems behind itself.
S&P 500: 1,079 (down 3.83% for the week and down 3.23% on the year)
NASDAQ: 2,173 (down 5.03% for the week and down 4.23% on the year)
Dow: 10,303 (down 3.29% for the week and down 1.20% on the year)
US Treasury 10 yr: 2.68% (from 2.82% last week)
Crude Oil (September): $79.59 (from $80.70 last week)
Gold (December): $1,217 (from $1,205 last week)
USD/Euro: $1.2750 (from $1.3282 last week)
THIS WEEK
We get some forward looking data this week. The housing market will return to the center of attention with the Home Builder’s Index and Housing Starts providing an outlook for the future in new construction. Industrial production, the Empire State Index and the Philly Fed will offer an indication of upcoming economic activity while the Leading Indicators attempt to assess where the economy will be three to nine months from now.
COMMENTARY
The Gradualist
Ben Bernanke is a gradualist. He likes to give fair warning about what he intends to do, so as not to disrupt the markets, and then take baby steps in the direction of his convictions. We share with Ben an appreciation of the word “measured,” however the markets were less welcoming this week of what they considered to be Ben’s benign action.
On Tuesday the Fed introduced QE2 (Quantitative Easing, Part 2). Investors wanted a grand gesture, such as outright buying of U.S. Treasuries that would add to the Fed’s balance sheet (essentially printing more money and pumping it into the economy). Instead investors got only the promise that the Fed would not shrink its balance sheet. The Fed prescription only calls for reinvesting matured debt and principal payments on mortgages into new treasuries. This was deemed not to be enough by the markets. To add to the misery, the Fed admitted that the recovery was “likely to be more modest in the near term than had been anticipated.”
Investors started pulling money out of the markets on Wednesday, jump starting the week’s slide that erased 3-5% from valuations. Fears fomented that the economy was slipping into a Japanese style lost decade. U.S. debt interest rates continued to fall, sending the message that the bond markets were also feeling uncertain about the U.S. recovery. Not everyone, however, went into panic mode. Saner heads simply took some of July’s profits off the table, recognizing that stocks might be ahead of themselves.
Ben Bernanke’s measured approach was probably the best of several difficult choices:
• Do nothing and be accused of making the situation worse.
• Make a grand announcement of significant QE2 and provide the markets with a very temporary sugar high – to be replaced all too soon by concerns over spent bullets and runaway national debt.
• Take a baby step and repeat the commitment of further easing in the future. Ben would risk being labeled ineffectual, but market movements would likely stay within a range and not break out wildly to the downside.
Predictably, Bernanke took the gradualist route. He knows that while he still has some bullets left in his deflation fighting arsenal, he can’t use them all at once. Holding out means providing hope to the public that the Federal Reserve’s monetary policy can still have a meaningful impact on the struggling economy. As a historian, Bernanke understands that this recovery could take a long, long time if it follows the path of similar post crises recoveries of the past. The Fed’s role in stabilizing prices is far from over.
In fairness to the Federal Reserve, all expectations should not fall on them to solo pilot the recovery. Many aspects of the economy are not in their direct control. Therefore, we would much rather the Fed take measured steps, since gradualism implies time to assess and evaluate along the way. Markets can gyrate and jerk around with little accountability. The Federal Reserve cannot. There may be a time and place in the future for grand gestures and significant policy moves. But the current slowing economy does not call for that yet. We suspect that the pullback was probably in the cards, anyway, even before the week began.
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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