"Man not bitten by dog."
That might as well have been the headline about Federal
Reserve Chairman Ben Bernanke's decision to NOT initiate the
In a world of Fed-supported stock prices, what happened next
wasn't a surprise at all. The news of "no news" was enough to
send the Dow up 147 points. And the yield on the 10-year Treasury
fell by from 2.9% to 2.7% - a 6% drop.
Since last year, the Fed has been buying $85 billion of U.S.
bonds every month, in an effort to keep interest rates low. This
is uncharted territory for the Fed.
You'll recall that in May, the mere mention of the Fed's plans
to taper sent yields soaring. The yield on the 10-year Treasury
soared 75% in the last four months up to 3% from around 2%.
Mr. Market seemed to expect something differently. But you
should think about what this price action means:
A political official takes the stage in a big fancy press
conference, says basically nothing, and the market gyrates wildly
in reaction. It was widely anticipated that the Fed would "taper"
its bond-buying program this month. In fact, for the past few
months Bernanke and other Fed officials have been trying to
prepare the markets for a reduction in the bond-buying
But last week, the Fed decided to continue adding U.S.
government bonds to its balance sheet. So why did Bernanke
change his tune?
I can't read Ben's thoughts, but the official story goes
something like: The Fed wants to suppress interest rates a bit
longer to help strengthen the recovery. The fact is that
unemployment is stubbornly high, and economic growth is slower
than expected. This is concerning since there is a
currently a raucous battle over the Federal budget and the debt
ceiling in early October.
From my perspective, the story hasn't changed. In fact, I
predicted this exact Fed response back in June. Back then I
If the economic recovery is too slow, the Fed will be right
there, buying bonds to keep interest rates as low as possible.
This makes money cheap to borrow, and stimulates economic
They won't start increasing interest rates until the
economy begins dramatically improving. When rates rise,
it will only be because the Fed sees an improving U.S. economy.
The best thing for the stock market is a robust economy with
healthy GDP growth, low unemployment, increasing wages, and
rising home prices."
Every investor should be thanking Ben Benanke for the huge
gains in the stock market over the last four years. After
all, it's the Fed's easy money policy that encouraged investors
to take risks and buy stocks. And that's sent the S&P 500 up
147% from the 2009 lows.
Today, Bernanke is telling the markets that he'll be right
there, continuing to support the stock market. I don't know if
that's a good idea or a bad idea, but it's great for the stock
market - and I firmly believe Bernanke, and whoever takes his
place when he steps down this January, will keep the gravy train
The upside is still significant. Don't miss it.