Saturday September 1, 2012

The Federal Reserve Bank decided to forego further easing for the moment. That doesn’t mean they won’t. It just means the economy is not yet at that point where more stimulus is necessary.

The stock market, which has been climbing all summer in anticipation of another bout of easing, took the news in stride. The averages gyrated up and down but never really went negative despite what some perceived as disappointment. News out of Europe helped sustain the bulls and the averages. Expectations that the European Central Bank "might" further ease monetary conditions next week kept the markets buoyant. And if not Europe next week, the Fed could always ease at their next meeting in mid-September.

Grasping at straws might be a good way of parsing the rumors that surfaced on Friday that the president of Germany’s Bundesbank has threatened to resign. Bulls were guessing that the only reason he would quit is if the European Central Bank was ready to provide more stimulus against the wishes of Germany. It was rather silly that anyone would believe this story, but consider the timing.

The rumor surfaced just hours before the Fed disappointed the markets. It also occurred on one of the slowest trading days of the year when volume was miniscule and participants were leaving early for the three-day Labor Day weekend. It sure smells like an attempt at market manipulation and it worked!

I have to hand it to the central bankers.


Advertisement

Both Ben Bernanke and his counterpart in Europe, Mario Draghi, have learned the lingo that keeps the markets high and happy. Words like "fairly soon" or, in Draghi’s case, "exceptional measures," when talking about future stimulus has worked like a charm. In these markets, where nothing matters but the next fix from the central bankers, government officials are becoming adroit in parceling out just enough hope to keep the stock markets calm and trending upward.

The stock market has also been developing a more positive attitude thanks to the Republican convention this week. The most recent polls show Mitt Romney in a dead heat with Barack Obama. Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets.

Personally, I would like to see the S&P 500 Index break out of its present range, which has bounced between 1,400 and 1,426 throughout the month of August. It has been encouraging that the bottom level of support has held but so has the resistance at the top. This sideways consolidation is constructive since it has allowed the markets to work off any overbought conditions.

Clearly, no one has made much money in August. We are now entering September, considered the worst trading month of the year in terms of market gains. Some strategists are expecting as much as a 10 percent pull back. As I’ve written in the past, stocks could easily pull back 3-5 percent at any time, but that’s about it. With both the U.S. and Europe’s central banks promising to bail out two-thirds of the world’s economies, any dip should be contained and simply provide an opportunity to buy equities at cheaper prices.

A note to my readers in the Berkshires:

I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America’s Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year’s presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at (413) 236-2190.

Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Schmick’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com