Ben Bernanke blew the lid off the Market this week with the reiteration that the Fed is staying at the helm in defense of the US economy. The 7% stock slide that started in May has been erased and both DOW and S&P reached new, all-time highs. The spike in interest rates has subsided a bit. Bonds have stabilized. It’s been a volatile summer, and this summer is still very young.
But nothing really changed. The Fed has stated all along that it plans to keep rates at zero for some time, until the unemployment rate is below 6.5% and/or inflation becomes a problem. Unemployment is still at 7.6% and core inflation is 1.7%, below the Fed’s 2% target. There is a question of when the aggressive quantitative easing campaign, dubbed QE, will come to an end. As we know, this aggressive monetary policy can’t go on forever. Bernanke’s term ends in January, so his successor will likely be the one to oversee the unwinding of current monetary policy activities.
Higher interest rates have a major impact on transactions. They are a driver of stocks, bonds, housing, and even credit cards. The jump in rates sent both stocks and bonds lower, and mortgage applications fell 15% in June. Housing has been a key component to the recent economic revival. We know interest rates are ultimately going higher, they need to. It’s just important that it happens naturally over time.
The backdrop for the US stock market remains quite strong. Even with the 2013 gains, stock prices are generally still not expensive. Corporate America is in really good shape, and despite the recent jump in interest rates, they’re still historically quite low. Earnings will dominate the news next week, with many high profile companies set to report. Earnings season is the time where companies report the facts of how they’re doing, and provide insight into where we’re headed. It’s going to be a long, hot summer. Enjoy it.
Have a great weekend. We’ll be back dark and early on Monday.
By: Mike Frazier
