What are the facts? Aside from an improvement in jobless claims, increasing productivity, and declining labor costs (all reported last week), presidents from the Federal Reserve of Boston and San Francisco have both stated that they support more Federal Reserve intervention. This falls on the heels of Chairman Bernanke who last month said “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.” In other words, the Fed will act if needed.
All of this is why the stock market continues to climb: the prospects of good news drives it higher, and the prospects of bad news drives it down. The mere act of government intervention itself isn’t what is positive; it’s the influx of money into the economy which businesses use to purchase assets and hire employees that causes the bulls to salivate.
So, some ask, if quantitative easing is good, why hasn’t it worked (meaning, why hasn’t it turned the ship around) the last 4 times over the last handful of years? I have read many, many arguments about this from economists on both sides, and my favorite analogy (which is imperfect, I’ll admit) is that you don’t stop putting water on a fire just because it hasn’t yet been extinguished. There is no perfect situation, and the whole reason for the Federal Reserve is to handle situations just like this one. It’s very easy to be an armchair quarterback, but more difficult to make the tough decisions that the Fed has to make on a regular basis. If this was easy to do, there would be no discussion; it would have already happened.
This week will have a slew of economic reports that will give further direction, and the Federal Reserve’s potential for action next month will continue to buoy the markets – and stave off any prospects of another recession as well. However, the absence of intervention in the face of stagnation, or some major compression occurring in Europe, would certainly be detrimental to the upward momentum we are seeing at present.
Should you worry? You can if you’d like, but you can’t do anything about the macroeconomic environment in which we live. Stocks are volatile, cash doesn’t earn a thing, bonds are under severe pricing/rating pressure due to the events in Europe, and gold doesn’t produce income and is only worth as much as someone else is willing to pay for it. However, all are good investments, and should be held in a diversified portfolio allocated according to your investment objective, and rebalanced periodically. If you’d like to know more about how we do this and more for our clients, please contact me!