AM Market Update

After a 550 point decline in the DJIA in the last two days, this morning the index is opening slightly better. Global stock markets mixed today, some better some worse but overall not much change in any global equity markets after the Bernanke shock on Wednesday. The world is facing the possible end of central banks driving markets and having now to adjust to the real underlying fundamentals. After years of Fed money printing and low interest rates the new question, one that has been pushed under the rug for four years, what is the real status of the US and global economies? Taking away the blanket of comfort is always a chilling; now markets and economists have to actually look at the economic outlook from the perspective of reduced stimulus. What exactly is the consumer capable and willing to do with spending, what will small business do about employment as interest rates increase, what is the real fair value of stock prices when the stimulus is subtracted? Lots of questions with no significant answers at the moment.

                                             

At 9:30 the DJIA opened +78, NASDAQ +8, S&P +7; 10 yr at 2.44% +3 bp and 30 yr MBS price +13 bp frm yesterday’s massacre.

 Wednesday Bernanke shocked the financial world when he surprisingly defined what and when the Fed would do; up to that point it was all speculation frm Fed watchers and even within the Fed itself. Now the gauntlet has been laid; at least it has been outlined. Don’t overlook that Bernanke also said that the actual actions by the Fed to begin unwinding the stimulus was dependent on the economy, presently the Fed believes the economy is on the road to recovery although slowly. That Fed view led to Bernanke’s decision to begin the tapering. The Fed’s track record on economic forecasting isn’t any better than private forecasts just because it is the Fed, so while the momentary outlook for interest rates has become more bearish it isn’t cast in stone unless the Fed’s economic outlook is proven correct.

 

 

 

So, where are we now? For all the talk and forecasts, and the Fed’s actual future actions, it depends on how healthy the economy really is when seen without the central bank supporting investments and low interest rates. Recent economic data overall has been slightly better based only on estimates and forecasts, but we ask this; is employment increasing with new jobs that pay wages at levels that will improve 80% of wage earners? Will businesses continue to report solid earnings and profits as they have in recent quarters? When ObamaCare kicks in in 2014 what impact will it have on individuals and business ( costs will increase)? Presently markets are not thinking about any of it, all market action in the last two weeks has been driven by reducing leverage and making decisions on the fly. Let’s give this a couple of months; we still hold that the economy isn’t as fundamentally strong as what most, including the Fed, believe it is.