Friends
We got the Fed announcement today as well as the second Bernanke press conference, and the take away for us was that Dr. Bernanke has no intention of raising interest rates anytime soon, and should it become absolutely necessary, additional measures would be taken. The Fed’s dual mandate deals with inflation and employment. It appears that the Fed is becoming more comfortable with their attempts to reflate the economy and that inflation levels are moving towards their targets (apparently 2%). On the other hand, Dr. Bernanke did express concerns that the employment problem has been more persistent than the Fed had expected, and that this combined with any move back towards deflation would cause the Fed to consider additional measures.
Dr. Bernanke did confirm the belief that the second quarter slowdown could, indeed, be temporary, brought on by the Japanese crisis, high gasoline prices and bad weather, and that we should see growth back near the 3% to 4% range in the second half of the year. That’s not great, but it would be better than 1% to 2%.
Our belief is that the Fed has really done about all it can do, and that it is time for action on the fiscal (Congress) side of the equation. QE3, or simply expanding the Fed’s balance sheet, would do little for the actual economy itself. As we mentioned Friday, the tank is full of gas. Adding more fuel would simply be overkill at this point. We need Congress to start the engine by dealing with the budget deficit.
As for the situation in Greece, the confidence vote that the Prime Minister received last night calmed the markets for the time being, but only delays the inevitable. They will now try to pass the austerity measure needed to receive the additional IMF loans, which will simply have the effect of throwing good money after bad and making their deficit hole even bigger. The result will be unhappiness in the streets of Athens as citizens will attempt to stop the implementation of the austerity programs.
On the other hand, if Greece defaults on their debt, which the man in the street will call for, then the contagion question comes into play. Who will be affected? The European Banks for sure. Then we would find out how far the tentacles reach. Dr. Bernanke seems to feel that U.S. Banks would have minimal exposure, but did admit that confidence in markets would be affected. Clients have been asking, how does Greece affect us here in the U. S.? If Greece defaults, who is next? Spain? Italy? Ireland? All these countries would have a more difficult time funding their deficits as their cost to borrow would certainly rise.
As for the markets, the question always is, what is already baked into the prices that we see. Our feeling has been that the summer will continue to be challenging for stocks as there is so much uncertainty. Having said that, we feel that some good buying opportunities should develop as the summer unfolds and we are looking to earnings season, starting the second week of July, to get a good indication of how leaders of corporate America feel about the second half of the year prospects.
Stocks had risen right to the S&P 1295 resistance level yesterday and early this morning, only to fall back in the last hour of trading today with the Dow down 80 points and the S&P closing at 1287. It looks like the 1250 to 1300 range for the S&P 500 is where we have settled as the summer begins. We’ll check in with you on Friday to give you and update on things.
Have a nice weekend everyone.
