As I listen to the Federal Reserve Chairman speak this morning, it becomes more clear that the Fed is determined to do anything necessary to prevent the economy from slowing even further. Dr. Bernanke is making it clear that even though they are considering non-traditional matters, the lack of job creation and the very slow economy warrant actions that he feels cannot be avoided. The CPI number just released this morning came in with the core number at 0%. This gives the Fed cover to continue to pursue these non-traditional measures, namely quantitative easing (buying up securities to pump money into the system), as they have no options left in terms of interest rates. They are at zero, therefore there are no bullets left in that more “traditional” gun.
On the earnings front, for the most part, we continue to get good net income numbers from large US Corporations. Top-line revenue numbers, on the other hand, although not terrible, continue to be where the challenge lies. Demands, on the retail as well as wholesale level, is not robust, and that stems from the lack of job creation. Both businesses and consumers are reluctant to spend, and that is where our problem lies. Remember, about 70% of our GDP comes from consumption. Sure, as I pointed out in the past few weeks, personal savings has increased from 0% to about 6%, and we know that US Corporations are sitting on tons of cash. The problem is that we need money in motion to create economic activity.
What does all this mean for stocks? Well, it is clear that the Fed will continue to attempt to provide a floor for risk assets, as their actions cause the dollar to continue to fall and stocks, gold and commodities to rise. For risk assets, it is almost as if “bad economic news is good news.” With the Federal Reserve as their backstop, traders continue to feel that they are working with a net below them and seem to be content to add to stock positions. As long as earnings continue to meet of beat expectations, and there are no major surprises in the November elections, the Fed’s “backstop” should provide the market with the fuel it needs to move higher. Not a prediction, just an observation. Remember, we are not market “expects”, we are simply market “observers”, and our job as money managers is to interpret what is in front of us and invest your money accordingly.
The long-term picture, of course, remains very cloudy. Interest rates should stay low for now, and that is good for bonds, but the long-term consequences of “easy money” gives us more than enough to worry about for the future. As I always say, though, trade the market we have in front of us, and not the market we think should be in front of us. In the meantime, stocks, bonds and commodities are where the Fed wants money to go. Remember, don’t fight the Fed!
Have a nice weekend everyone.
