The broad market came through two major news events intact yesterday. The elections ran according to the script laid out and then miraculously the Fed played according to script as well. Following the afternoon announcement the markets acted as if they really didn’t know how to respond. The traders were set to respond if it was too much or too little stimulus, not just right. The day ended in positive territory with the Dow and the NASDAQ above their April highs. The S&P 500 is still below that point, but poised to make a run. Thus, all things are right as the market moves higher? You’ll have to watch the rest of the movie to see how it ends.
There was one surprise yesterday, the dollar held support and bounced back to even on the Fed news only to close modestly lower on the day. Pumping an additional $900 billion of liquidity into the system doesn’t generally get that response. I was still scratching my head last night over the reaction. Then this morning as I reviewed the data, there it was, the dollar fell nearly 1.5% overnight. All things are in balance now! The market rally has been produced for the most part by pumping liquidity into the system. Growth has been anemic at best and additional liquidity is likely to produce another push to the upside for equities. As the saying goes, don’t fight the Fed and that has certainly been the case the last two years.
The devaluation of the dollar remains the trend and the results have been effective for stocks prices, commodities and emerging markets. The economy on the other hand has not been a big benefactor. The cost to produce a roughly 3% average GDP growth over the last eighteen months was steep. Trillions of dollars of debt in exchange for 9.6% unemployment and a current GDP growth rate of 2% is hardly a win/win. The trade deficit has expanded, not contracted, under the current trash the dollar program. The pontificated benefit of a cheaper dollar is more exports benefiting the US manufacturing sector. It has not materialized, nor outweighed the cost, at least to this point in time. In fact the cost in other areas are proving to be inflationary.
The Fed announced what became coined QE2 the last week of August. Since that time crude oil has risen more than 20% the last eight weeks. The dollar has dropped 10% in response and Gold has climbed 10%. The agriculture commodities as a whole rose nearly 16%. Cotton is up more than 50% alone. Those prices are just starting to push through at the producer level. What is the impact to margins for companies? What happens when it makes it to the consumer level? We are paying 12% more for gasoline today than eight weeks ago. What about importing goods? Aren’t we buying them with a weaker dollar? Isn’t that inflation?
I am not attempting to be negative, by all means take what the market/Fed give in terms of free money! But, remain aware of your surroundings. At some point the merry-go-round stops, so does the music, and we all realize it was plastic horse we were riding and there was nothing real about it.
We have one more news event on the week – jobs! The analyst are looking to add 70,000 for the month of October. Not close to the 350-500k we need to produce to expand the economy, but at least we are hoping to add jobs. Stay focused and discipline, keep your risk in check and manage your emotions.
Disclosure: no positions