Friends,
Although politics is what is on everyone’s mind today, I would first like to comment on the very important Federal Reserve announcement. Dr. Bernanke again declared that the Fed is “all in” and will do whatever is necessary to make asset prices rise (stocks?). The announcement that Fed will purchase treasury securities at the pace of about $75 billion a month for the next 8 months was right within the range of expectation. They continued to describe an economy that needs to be inflated and they are determined to do so. What is the takeaway for the markets? For stocks, I will for the 238th time, refer to the old adage “DON’T FIGHT THE FED”. Mr. Bernanke is determined to make stock prices rise, thus creating a wealth effect that just may get people to spend some money. God knows, they aren’t getting a feeling of increasing wealth from their home value, so stocks seem to be the object of Mr. Bernanke’s affection. Now, you may not believe that the Fed will succeed in its quest, but you are going up against a well-armed opponent should you chose the other side of the trade.
As for bonds, I really don’t know how one could expect to achieve any more capital appreciation from this point on. This is about as good as it gets, so enjoy. The day of reckoning is down the road, and will not be pretty. Don’t get me wrong, we hold bonds, but when the music stops and rates begin to rise, where one lies along the yield curve (not to mention credit quality) will determine one’s threshold for pain. Be assured, that the Fed is determined to inflate the economy. We just hope that their 2% target doesn’t become a speed pump on the way to out of control inflation. I was going to refer to Dr. Frankenstein’s monster, but we’ll move on.
As for the election results, which I know interest you all much more than the Federal Reserve and Dr. Bernanke, the Republicans made their expected gains and will take control of the House of Representatives. The Senate will remain in the Democrat’s control, but the margin narrowed. I won’t get into the politics of it all, as we would rather focus on how the markets are affected. Because the results of last night were very much expected ahead of time, stocks really didn’t have much of a reaction on the opening this morning. The most important question that investors will be asking is what will happen to taxes. It appears that the Bush tax cuts will be extended for some period of time and the market will likely view that as a positive for now. The rhetoric over spending will be the challenge, as it always is, to both parties, and the effects of budget cuts to the economy may become worrisome to investors. We may have gotten all the juice we are going to get out of political change, when it comes to stocks. The rest may just lie in the hands of Dr. Bernanke.
After a quiet morning, stocks dropped shortly after the Fed announcement, only to recover by the end of the day with the Dow Jones Industrial Average ending the day up 26 points to close at 11,215 which is the high for the year. The S&P 500 closed at about 1197. After trying to decide whether stocks had already built in the Fed and political news, traders are left with the reality that the Fed has played its “all in” hand and the political landscape most likely will leave us with gridlock. We will get the unemployment number on Friday, but until then traders and investors must choose a side. Are you with the Fed or against them?
Have a nice evening everyone.
