“Nothing, For The Most Part, Surprises Me Anymore”

By David B. Armstrong, CFA | Sep 23, 2013 | Weekly Market Commentary

Brett Favre is credited with that quote but I suspect even he was surprised by the Fed last week when they stunned everyone, including the entire crew here at MWM, with their decision not to taper last week.  The reaction on the Street was immediate. Read on.

The Fed Announcement

U.S. and global stocks surged on the news Wednesday with the Standard & Poor’s 500 index (S&P 500) and the Dow Jones Industrials both closing at new highs while bond prices rose sharply and yields fell. It was interesting that the Fed’s lack of confidence in the economy helped stocks at first but by the end of the week shares were off the Wednesday closing highs.

There were several reasons for the Fed’s decision to delay a reduction.

First – The Fed is worried that the sharp increase in mortgage rates over the last couple of months could dull the economic recovery and dampen some of the enthusiasm we’ve been seeing in housing.  Housing and cars really have a huge impact on the economy.

Second – The Fed is concerned that the sequester and recent tax hikes may be hurting economic growth. On top of that, the looming budget (political) battles in Washington could hurt the economy…  Not to mention the markets!

Third – 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.”

Fourth – Yellen may already be calling the shots and she got her way at the last meeting.  But that’s speculation since we still don’t know if she’s got the job.

So what happened? Bernanke laid out a pretty clear strategy during the famous June press conference when he said he expected a reduction in purchases in the fall (translation – September), with measured cutbacks continuing into the winter, possibly ending by mid-2014 when the unemployment rate could be in “the vicinity of 7%.”

At the June meeting, the unemployment rate stood at 7.6%, and has since fallen to 7.3%.  That’s pretty close to 7% by the way.

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.” Ahhh, hello!?  No magic jobless number? Maybe something like the 7% that was mentioned in June!?

So clearly he decided to reject the 7% target introduced just 3 months ago which is not only confusing to me but also confusing to just about everyone with an opinion on the matter.  Below is a chart from Bespoke Investment Group that shows the opinions leading up to Wednesday.

Washington D.C. Circus

Washington is locked in a very public battle over funding the government.   On September 30, 2013, all non-essential services will cease to be funded if there is no deal. After that, there is the battle over raising the debt ceiling sometime in mid-October.  Both sides are posturing and hoping to gain an advantage in the court of public opinion.  I suppose if I had to pick fighting one battle over the other, I’d pick the one that would not cause a global economic implosion to play chicken over. (If the debt ceiling were not raised, it would probably cause the U.S. to be unable to meet its financial obligations and possibly send the global markets into a panic). Hence, the silver lining is that the line has been drawn in the sand on the shut-down fight and not the debt ceiling fight.

Again, from Bespoke, the chart below shows the S&P 500 from July of 1995 to July of 1996.  The red lines show the periods in that year when the government was actually shut down.  This period was the last time we had a major government shut down like the one we could potentially see in the next week or so.  If it happens, I hope it’s no more catastrophic to the market than the red lines below.

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Investment advice offered through Monument Advisory Group, LLC a Registered Investment Advisor (RIA). Securities offered through LPL Financial.  Member FINRA/SIPC.  Monument Advisory Group 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.