Will the
Fed’s action
help out the economy and the markets?
Markets
had a lackluster week as investors shrugged off two pieces of relatively
positive news: that Greeks voted a pro-bailout party into office, and that the
Fed took additional action to stimulate the economy. Despite a couple of strong
trading sessions, markets lost ground for the week; the S&P closed down
0.58%, while the Dow lost 0.99%, and the Nasdaq gained 0.68%.
On a
positive note, a few reports released last week indicate the economy could pick
up steam again. April housing starts were revised upwards to 744,000, and
building permits climbed from 723,000 in April to 780,000 in May, beating
economists’
expectations and hopefully indicating the housing sector is improving.[i] Also
noteworthy, the Conference Board’s index
of leading indicators, a measure of future economic activity, rose to its
highest level in four years last month, signaling that the economy should keep
growing at a modest pace this year.[ii]
The
biggest news last week was that the Federal Reserve will take additional
measures to boost the economy by swapping another $267 billion of short term
bonds for long term ones, and extending “Operation
Twist” through
the end of the year. The idea is to lower the interest rate of the longer
bonds, which in turn is supposed to lower interest rates for borrowers on
mortgages, cars, and business loans. Fed Chairman Bernanke stated that
additional easing would be considered if necessary, but many investors hoped
for more from the Fed, particularly in light of its tepid economic forecast for
2012. The Fed now expects GDP growth to range from 1.9% to 2.4%, down from
previous estimates of 2.4% to 2.9%, and expects unemployment to remain between
8.0% and 8.2%. Markets responded poorly to the news, highlighting concern that
the Fed is running out of bullets and may not be able to respond effectively to
further challenges.[iii]
Coming
weeks could be hard on equity markets if the global economy continues to slow,
though investors have shown signs of resilience lately, indicating that many
negative factors might be priced in. There are a lot of mixed signals right
now, and it is simply impossible to predict how the market will respond. In
uncertain times like these, it is especially important to stick to a comprehensive,
long-term investment strategy.
On a
side note, traders will be closely watching Monday’s Supreme Court ruling on
President Obama’s
healthcare plan; whichever way the vote goes, we will likely see some action in
the healthcare sector.[iv]
ECONOMIC CALENDAR:
Monday: New Home Sales, Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: Durable Goods Orders, Pending Home Sales Index,
EIA Petroleum Status Report
Thursday: GDP, Jobless Claims
Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment
HEADLINES:
Spanish
banks need far less than originally believed. Spanish finance ministers
announced Thursday that their struggling banks may only need up to 62 billion
euros ($78 billion) to recapitalize, far less than the originally expected 100
billion euros. The requested amount was based on the results of two independent
audits, which examined both best case and worst case scenarios before
developing the bailout request.[v]
Housing
market tough for many buyers. A combination of low
housing stock and wary lenders is creating problems for homebuyers in many
cities. First-time homebuyers who rely on financing must compete with cash
offers from investors and bidding wars with other buyers, creating upward
pressure on housing prices. Rising prices or a cooling economy may increase
housing stock, easing the process for buyers.[vi]
Spanish
bonds rally as ECB relaxes lending rules. The European Central Bank
will ease its collateral rules, allowing Spain to pledge a wider range of
assets, including lower quality ones, in exchange for cash loans to revive its
monetary system. Yields on 10-year Spanish bonds fell as investors felt
reassured about Spain’s future.[vii]
Gas
prices headed still lower. Amid the economic gloom, a bright spot for
consumers is that slower economic demand is resulting in lower gas prices
across the country. With oil inventories at 21-year highs, and demand slacking,
consumers could see prices as low as $3.00-$3.20 by autumn, pumping a
much-needed extra $114 billion into American pocketbooks.[viii]
QUOTE OF
THE WEEK:
"My motto was
always to keep swinging. Whether I was in a slump or feeling badly or having
trouble off the field, the only thing to do was keep swinging." ~ Hank
Aaron
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