The Markets:
FED Surprises!
That was the late Wednesday headline that came from Inside Reuters after the Fed decided not to reduce its monthly bond purchases of $85 billion. You see, the general consensus by most on the Street had been for a modest reduction in the neighborhood of $10 billion. The reaction on the Street was immediate. U.S. and global stocks surged, with the S&P 500 Index and the Dow Jones Industrials both moving sharply higher (St. Louis Federal Reserve data, Wall Street Journal), while bond prices rose sharply and yields fell (bond prices and yields are inversely related). Gold, silver, and commodity prices also jumped on the news.
The news also helped our current portfolio positions, almost across the board, with increased bond, stock, and commodity prices. We did implement some portfolio changes last week, re-positioning some of our stock holdings and re-balancing portions of our overall allocations.
Interesting, a Fed that has a little less confidence in the economy helped stocks, but by week’s end, stock indices did ease off Wednesday’s closing level.
Reasons for the Fed’s decision to delay a reduction:
1- It’s worried the sharp back-up in mortgage rates in the last couple of months could dull the economic recovery and dampen some of the enthusiasm we’ve been seeing in housing.
2- The Fed is also worried about what it called the “fiscal retrenchment,” i.e., the Fed wants balanced deficit reduction, but is concerned the sequester and recent tax hikes are hampering economic growth. Plus, the looming budget battles in Washington could hurt the economy.
3- Finally, the Fed’s statement released at the conclusion of its meeting acknowledged “the improvement in economic activity and labor market conditions,” but it wants to wait for “more evidence that progress will be sustained before adjusting the pace of its (bond) purchases.”
So why expectations of a tapering? Fed Chief Ben Bernanke laid out one of the clearest monetary roadmaps in memory at his June press conference, saying he expected a reduction in purchases in the fall (many pegged that date as September), with measured cutbacks continuing into the winter, possibly ending by mid-2014 when the unemployment rate might be in “the vicinity of 7%.”
At the press conference on Wednesday, Bernanke noted the unemployment rate isn’t always “a great measure” of labor conditions, and there is “not any magic jobless number we are shooting for.” Therefore, he seemed to disavow the 7% target introduced just 3 months ago. Confused? So were many analysts.
We have consistently discussed some of the drawbacks of using the unemployment rate as the leading gauge of the labor market. One more illustration is provided in the chart below, which measures the percentage change in nonfarm payrolls from the prior 12 months.
Nonfarm payrolls measure the number of people working, and growth following recessions has gradually been slowing. Moreover, the chart underscores the damage done to the labor market in the latest recession.
When an irresistible force meets an immovable object
Looking ahead, the politicos in Washington are locked in a very public battle over funding the government (Sep 30th deadline) and raising the debt ceiling (as early as mid-October), with both sides posturing to their respective bases and hoping to gain an advantage in the court of public opinion.
The lack of any agreement could create heightened uncertainty and added volatility. No one has a crystal ball, and it’s possible we could get a last minute deal, just as we saw in the fiscal cliff negotiations late last year and the summer budget negotiations of 2011. As has been the case in the past, most likely, some type of agreement, probably short term again, will be reached and then we could see business as usual again until the next deadline sometime later this year or early next year. We will keep you apprised.
We appreciate the privilege to serve each of you and look forward to seeing many of you at our upcoming client event on October 3rd at the Devon Tower as we celebrate our 30th Anniversary as an independent investment advisory firm. As always, don’t hesitate to call if we can be of further service in any way.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results..
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.