We ended the week with plenty of talk about stimulus from both Europe and the Federal Reserve. That was enough to send the market back towards the highs on Friday and the hope of more free money to stimulate the market… I mean economy! Mr. Bernanke stated he has “scope for further action”. However, Mr. Draghi is outlining a bond buying plan of action. Both comments gave hope heading into this week of trading. As I stated last week, actions speak louder than words. The anticipation and expectations are building and in this case it is likely the rumor is better than the news.
The economic data remains on the weaker side as the Durable Goods Orders showed a solid top line number increasing 4.2% versus the 2.4% expected. However, ex-transports it was down 0.4% and business orders fell 3.4%. The business number is the one to note. Business isn’t spending as the lack of clarity relative to growth is keeping them on the sidelines in just about every category. Commercial real estate is reflecting the slowing in business as well. The data is rear view mirror, but it is showing a trend looking forward as well with the business spending on the decline. My question is will the stimulus promised from the Fed going to change the current direction for business?
Each stimulus injection since the 2008 decline has been less and less effective. The spending done by the Fed can only do so much. The stimulus is intended as a primer to allow businesses to jump start the economy. To this point they have been neutralized by regulations and additional burdens from the Federal Government. The outlook hasn’t changed, but the hope of stimulus is back on the table as short term motivator for investors. Accept it for what it is, but don’t make assumptions about the future that the stimulus can’t provide.
Bond yields have moved lower again in anticipation of the stimulus with the ten year at 1.67% versus 1.86% earlier in the week. Gold has jumped to $1672 per ounce on the stimulus talk. Oil is over $96 per barrel on hopes of demand rising. The euro is back near 1.26 on the news. These are all indicators of what investors believe will be action taken by both the Fed and the ECB soon.
As we start the week the focus is on the central banks, but the markets may meander through the week as no action is expected until the speech by Bernanke on Friday. There will be plenty of additional economic data out to digest, but it will be given lip service more than serious consideration in light of expected stimulus.
There is hope of the upside continuing in the markets based on the stimulus offered. I am not quite as optimistic on that front. It is likely to be mor anticlimactic than a push higher for stocks. Yes, the new money will find its way into the markets versus the economy as there are no new jobs or borrowers. Businesses are not expanding they are protecting and the list is long as to what is expected versus what is reality. Thus, take any run higher resulting from this news or action taken by the Fed, but remember the sugar high will wear off. Protect the downside and let this all play out accordingly.