Bernanke’s Loose Threats Spook Markets
Written by Keith Springer 5.31.13
Investors have been cautious since last week’s comments by the Federal Reserve (FOMC) that the economy might be strong enough to stand on its own and further stimulus might begin to wane or even go away. Clearly this is a market addicted to Fed stimulus and QE programs, and any thought that the Fed would shut down the dollar’s printing press will most likely cause a big sell off on Wall Street.
In today’s world, good (economic) news is bad news, as it would mean that the stimulus would go away. On the other hand bad economic news is good news, because it implies that the economy needs further stimulus with the Fed leaving it in place.
With yesterday’s disappointing GDP release, which showed the economy growing at only a revised 2.4% last quarter, investors are likely to be relieved. Today’s report that consumer spending surprisingly declined last month will reinforce that notion. Perhaps most important of all is that inflation remains subdued. Today we learned that inflation has been running at only .7% for the last 12 months. Of course that’s the government inflation indicator, because we all know that our politicians do not eat, drive, turn on the heat, or buy milk.
Deflation aka “negative inflation” is a major concern because “deflation” is enemy #1, as I discuss in Facing Goliath, and all the Feds stimulus effort is not creating inflation as many feared. Japan has been in the doldrums for over 20 years with deflation, and they just started a massive stimulus program in an attempt to create inflation. It is my belief that with inflation below the Fed’s 2% target, the printing presses will continue working overtime.
That said, the market is overdue for a correction and although they hurt, they are necessary. Historically, June has been one of the poorer performing months of the year. Since 1949 it has advanced 33 times and fallen 30 times, close to equal. But the poor year’s performance outweighs the positive year’s gains, giving June an average -0.1% loss.
We have been living with lower than normal volatility, so expect that to rise along with your anxiety and nervousness. I naturally hate to say that, but that’s just what happens when the markets pull back, even if only for the short term. As of last week, the Dow had made it over 100 days without a 3 day losing streak. This is the longest streak of its kind ever!
All investors must prepare for the pullbacks and realize that they can come at anytime, and not to panic. Too many investors are underinvested, and with bond losses mounting, the appeal to move to equities remains powerful.
We are sure to see more volatility and painful pullbacks, so prepare your heart, mind, and most importantly your portfolio so that you are invested properly and positioned to get the best returns with the least risk possible, especially if you are retired or within 5 years of retiring.
…… and that’s where we can help. To learn more about our powerful proprietary Investment Management Strategy, which is designed to manage risk and deliver strong long term returns, and/or get a free second opinion on your portfolio, simply reply to this email, or give me a call a free consultation today at (916) 925-8900.