Archive for the ‘Stock Market’ Category
The Summer’s Economic Bumpy Ride
May 27th, 2011
A Goldilocks economy is one that’s neither too hot nor too cold, with moderate growth and low inflation, enabling an investor-friendly monetary policy. It’s safe to say that the current economy is friendlier to investors than it is to the public at large.
This seems likely to continue. The Conference Board reported today that its index of leading economic indicators fell 0.3% in April, the first monthly decline since last June. The pace of economic growth may be “choppy” in the summer and fall, the board commented. The LEI is a weighted gauge of 10 indicators. In April, four were up and six were down.
Also today, the National Association of Realtors reported that resales of U.S. single-family homes and condominiums fell 0.8% to a seasonally adjusted annual rate of 5.05 million in April. Economists had expected sales to rise to 5.25 million. Housing starts and permits for future construction also dropped unexpectedly. The residential real estate market has faltered again lately and shows little sign of rebounding soon.
Yesterday, the Federal Reserve released the minutes of its April 26-27 meeting. The primary discussion was of the exit strategy from the current era of exceptionally easy monetary conditions. The plan evidently is for very gradual tightening, as the economy allows for it, with the comment that it doesn’t mean any moves “would necessarily begin soon.”
The first step, as Fed chairman Ben Bernanke indicated after the April meeting, will be to let the Fed’s mortgage portfolio start to shrink by allowing securities to mature without reinvesting the proceeds in Treasury issues. Then the Fed could do the same with long-term Treasury bonds. At some point, the Fed might start to gradually sell mortgage securities, maybe after raising the benchmark short-term federal funds rate from its current zero-0.25% level.
But it may well take many months or even years for the Fed to actually start raising interest rates and generally tightening its monetary policy. And this very gradual process likely will be accompanied by periodic statements that clearly signal the Fed actions to come, another plus for investors.
The Fed’s moves and their timing, in turn, will depend on how the economy is doing. For now, with the tradestalker economy sending out signals of slowing growth, it looks like the Fed will act slowly indeed.
Getting back to Goldilocks: Stocks broke a three-day losing streak yesterday, perhaps in part because the Fed minutes showed that monetary policy will remain investor-friendly for some time to come, regardless of the expected termination of quantitative easing at the end of June. Energy stocks and other economically sensitive issues, which had suffered the most in this month’s broad-market weakness, fared best yesterday. Stocks continued to rebound today with a more moderate advance.
Among the other factors suggesting that monetary policy will remain easy, at least in most of the world’s so-called developed nations, is the ongoing euro decisionbar debt crisis. A year ago, Greece received a bailout of 110 billion euro. Ireland followed, and the bailout of Portugal is expected to be finalized soon.
Now it’s clear that the bailout of Greece has failed to restore that nation’s financial health, to say the least. There’s talk of a bond default, with no agreement yet among the various members of the European Union; the European Central Bank; the International Monetary Fund (currently in the news for another reason); and others on how to prevent what would be a big negative for the global financial system.
Goldilocks has her work cut out for her, and we didn’t even discuss the federal debt ceiling.
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