Saturday June 9, 2012

It was one of those "scratch your head" weeks on Wall Street. Markets rallied in anticipation that both the European Central Bank and the Federal Reserve were going to announce some kind of new stimulus. Investors walked away empty-handed.

In hindsight, the market’s expectations made little sense. Why would European Central Bank (ECB) President Mario Draghi, speaking earlier this week, announce a new stimulus package prior to the outcome of Greek elections on June 17? If the moderates win, and there is a 50-50 chance they will, then there may be no need for any kind of immediate stimulus.

Granted, the declining economic picture in Greece certainly helps the anti-austerity, pro-growth, radical opposition party. Unemployment is now at 21.9 percent. The economy shrank yet again in the first quarter as a result of spending cuts and taxes. GDP is now declining at a 6.5 percent annual rate. But miracles do happen and the moderates could prevail in next Sunday’s elections, despite the dreadful state of the country’s economy. But the ECB is certainly going to refrain from doing anything that might influence that election -- including any stimulus initiatives.

Here in America, the buzz was that Chairman Ben Bernanke was going to announce another stimulus package or extend the Fedís present stimulus "Operation Twist", (which ends at the end of this month). Once again I thought this kind of speculation was coming out of left field.


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In his testimony on Capitol Hill on Thursday, Bernanke delivered a carefully balanced view of the economy without any new stimulus announcements. Instead, he reiterated (as he has done in every Fed statement) that the central bank stands ready to intervene if necessary.

What both Bernanke and Draghi did say was there is a strong and immediate need for politicians on both continents to step up to the plate and deliver on their policy responsibilities. Reading between the lines, we should understand that central bank intervention (without fiscal action) becomes less and less effective. Bernanke said as much to his audience in the Q&A section of his appearance before the Joint Economic Committee of Congress.

Obviously the markets got it wrong this week, although the hope and a prayer stimulus stories did provide the excuse to push the S&P 500 index up almost 3 percent. To those expecting a snap-back rally, like me, the point is that the markets were oversold and due for a bounce; how we got there is immaterial.

So what happens next? As I said last week, we are getting close to a bottom. A good guess would be a low somewhere around 1,250 on the S&P 500 Index over the next few weeks. I’m sorry I can’t be more precise, but it is a tough market and there are a lot of moving parts that aren’t easy to decipher.

For example, China cut its key interest rate this week by 0.025 percent. Investors took that as a positive sign, hoping that it signaled a round of further cuts in the months ahead. Since growth in China (or the lack thereof) is vitally important to global growth prospects, investors were bolstered by the development. However, a slew of economic numbers are being released this weekend in China. Some China watchers worry that the data will be much worse than expected. If so, investors won’t take kindly to that news on Monday.

Then there is the meeting this weekend between Spanish authorities and finance ministers of the EU. News sources believe that Spain will ask the EU’s help in bailing out Spainís troubled banks. Bottom line: It is all noise that will insure that markets will remain volatile over the next week. Strap on your seat belts and welcome to summertime in the stock markets.

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