Monetary Policy – Full Speed Ahead

By David B. Armstrong, CFA | Dec 17, 2012 | Weekly Market Commentary

First and foremost, it goes without saying that our deepest condolences go out to everyone affected by the tragedy that occurred in Newtown, CT.

So – guess who’s playing Santa this year?  The Federal Reserve, that’s who! Along with continuing to pump large amounts of cash into the economy, the Fed announced  economic-based rate targets in their meeting last week. This means they will peg the fed funds rate to economic targets and not a calendar date.

Whoopee!  (Insert sarcasm here)

The equity market ended up declining even after learning that the Fed will KEEP pouring cash into the economy. While confusion over what the economic targets may mean for rates could have hampered reaction, I suspect it was a lack of any meaningful progress on Capitol Hill that played a larger role. (I’m NOT using the “monetary precipice” word today, but you KNOW what I’m referring to!)

Here’s how the markets did last week.

A Short List of Observations, then I’m Signing Off

I work in a regulated industry and thanks to Bernie Madoff the scrutiny is higher than ever.  I’m actually happy about that. It serves the public well and as long as a firm like ours is following the rules, there is never anything to worry about.  Until the auditors show up!

We are undergoing a 2 day surprise audit that begins today so I’m going to keep this short and just list off a few positives about the economy that I think are important to keep in mind.  Then I’m turning over my computer to them so they can inspect my internet browsing history…that should raise some eyebrows.

One significant positive for U.S. Real Gross Domestic Product (GDP) is the easing cycle that is taking place globally – referred to in “Finglish” (that’s a fun mash up of “Finance” and “English”, clever huh?) – as the Global Easing Cycle.  Additional positives are the significant decline in gasoline prices, positive signs out of China, a nice rebound from Sandy, an increase in housing starts, an increase in house prices (see more below), and increasing employment.

• The Global Easing Cycle – According to Ed Hyman with ISI, we are now in the 16th month of a Global Easing Cycle and it’s big with 308 stimulative policy initiatives having already been announced.  Global short rates declined last week to a new low of 1.63%.

• China Growth Probably Reaccelerating – Over the past two weeks, the Shanghai Composite has rallied almost +10%. This is a strong confirmation that China’s growth is reaccelerating.

• Another Good Week for U.S. Housing – We believe the combination of increasing housing starts and prices is a significant positive for the U.S. economy.  Housing prices are probably more important for the overall economy than housing starts because the prices lift consumer net worth and confidence of both consumers and businesses.

Now go get your holiday shopping done.  My dog got me an iPhone 5 as a gift for under the tree…gotta love that pup.

Please call or email with questions.

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Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Monument Advisory Group, LLC, a registered investment advisor.  Monument Advisory Group, LLC, and Monument Wealth Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.