As we have discussed several times in the past,
the FED’s efforts to keep interest rates low will stimulate spending indirectly
by increasing the “wealth effect” of American consumers who account for
two-thirds of our economy. Americans
generally feel wealthier when their home value and investment portfolio
increase.
If Americans feel wealthier, they will spend more,
thus stimulating the economy. As the
economy heats up, more jobs are created, adding to household formations thus
increasing real estate values again as well as lifting stock prices higher.
Report on REAL ESTATE: Almost all areas of the US
are showing modestly higher home values.
Some areas have witnessed increases over 15% during the past year. Source:
Case Shiller Index.
Report on the US STOCK MARKET: The total stock market value now stands at
$23 Trillion (a new all-time high) up from a mere $8 Trillion in March of 2009
(which had declined from $20 Trillion in October of 2007). Source: The World Bank.
CONCLUSION: The
FED’s monetary policy of low interest rates is raising Americans’ wealth
effect. As a consequence, we can expect
moderate to high increases in consumption for the remainder of this year.
With Thanksgiving and the holiday season upon us, investors are
getting comfortable. Who’s afraid of the tapering wolf? Fewer investors than
before, if last week’s equity and bond action is anything to go by.
Stock prices
finished higher for a seventh consecutive week, and the major U.S. indexes
closed at—you guessed it—record highs. Equity prices rose 0.4%, but that
includes a recovery from a nearly 1% drop at one point midweek, following
Wednesday’s release of the minutes from the October Federal Open Markets
Committee meeting.
The Fed
reiterated that economic trends would warrant a reduction in stimulus “in
coming months.” The central bank’s $85 billion monthly bond-buying program
has kept interest rates low and fueled the stock-market rally.
Both stock and
bond prices fell sharply after the release of the minutes Wednesday.
Nevertheless, by Friday’s close, equities had recovered all the ground and then
some. Meanwhile, Treasury bond prices also rose from Wednesday’s lows, though
they still fell on the week.
The Fed’s
tapering hints earlier this year elicited much worse reactions, notes Rick
Fier, a trader at Conifer Securities in New York. Wednesday, the bond market
spiked down, but the reaction was “short-lived and that suggests the
market is getting comfortable with the taper,” he says.
Michael Matousek,
head trader at U.S. Global Investors, concurs. “The big money would sell
bonds down hard if they got the idea that tapering is coming [soon].” The
bond recovery in the latter half of the week shows that “no one is in a
rush to sell bonds.”
On the week, the
Dow Jones Industrial Average gained about 0.6%, or 103 points, to 16,064.77 and
the Standard & Poor’s 500 index rose7 points to 1804.76. Both were new
highs. The Nasdaq Composite index added 0.1%, or 6, to 3991.65.
Investor
comfort—or complacency, say the bears—derives from an increasing belief that
tapering is off the table for the short time remaining in 2013, despite one
more FOMC meeting next month. And given that the holiday season is historically
an up period for equities, at this point investors might be more worried about
shopping for gifts than what stocks will do.
Matousek is
betting on tapering to begin in January 2014, and that the market’s upward
momentum will continue until then. It’s hard to see, he adds, the Fed tapering
the stimulus by the end of the year for a couple of reasons. Though U.S.
economic data remain generally positive, there’s no big number to hang the
stimulus reduction on. Perhaps more importantly, Fed Chair Ben Bernanke will
want a smooth transition to his expected successor, Janet Yellen, who, when
approved by Congress, would take over Feb. 1.
If the market is
getting inoculated, by the time tapering begins, will anyone care? (Source: Barrons Online).
