In light of the fact that the world is waiting on word from the U.S. Federal Reserve today and then the ECB tomorrow as to whether or not more stimulative measures are going to be forthcoming, we thought it would be an appropriate time to review what to (and what not to) expect from the world's most influential central bankers. In addition, we thought that this might be a good time to check in on the status of our major market models. In other words, we needed something to occupy our minds until the important announcements are made.
As far as the expectations from Ben Bernanke's bunch are concerned, the bottom line is that the vast majority of economists don't expect anything of substance to come from today's announcement. In fact, Bloomberg reported yesterday that 85% of economists don't expect Gentle Ben to announce any new asset purchase program (aka QE). Bloomberg also noted that 48% of the economists surveyed said that do they expect the FOMC to announce QE3 at the September 12-13 meeting. In addition, Reuters reports this morning that the Fed will likely signal that it is ready to act to help underpin the economic recovery.
The latest GDP data, which showed that the economy grew at a 1.5% rate in the second quarter (down from the revised 4.0% rate seen in the first quarter) wasn't as horrific as had been feared. While the economy has clearly slowed for the third consecutive summer, there is no imminent threat of recession at this point in time. And given that the Fed's ammo supply is arguably shrinking, Bernanke and Co. will likely want to see both the July and August jobs report before launching into another round of QE.
Obviously, "Fed days" are a big deal in the stock market. However, I had no idea that nearly all of the gains in the market over the past 15 years can be attributed to the days surrounding FOMC meetings. According to the computers at Ned Davis Research, the S&P 500 index (SPY) has moved up from 888 on 6/30/1997 to 1386 (as of 7/27). However, if you remove the returns from the "Fed days" as well as the day prior to FOMC announcements, the index would stand at just a smidge over 700. Thus, it is safe to say that it hasn't paid to "fight the Fed." For if one had "sat out" the day prior to as well as the day of FOMC meetings, they would lost -22% since 6/30/97 versus the +54% gain seen in the index itself.
Another way to look at the situation is that the Federal Reserve has been a real friend to the bulls and has done a remarkable job of delivering what the market had been either hoping for or expecting. So, with expectations running high for the Bernanke cavalry to ride again in the next month and a half, it is a safe bet that Gentle Ben is likely to deliver.
The ECB, on the other hand, is a horse of a different color as the European Central Bank has neither the dual mandate of the Federal Reserve nor the commitment to transparency that their American counterparts have. Yes, it is true that "Super Mario" (ECB President Mario Draghi) does appear to have gone out of his way to foreshadow an upcoming move - and a big one at that. However, the recent chatter out of the ECB hasn't supported the idea of a "bazooka" being fired at tomorrow's meeting.
Just yesterday, the WSJ reported that several ECB officials, including Bundesbank President Weidmann, were surprised by Draghi's dovish commentary last week that has fueled expectations for the ECB to ramp back up its bond buying program. It is important to recall that in the wake of Draghi's comments and the accompanying speculation about the bank's potential policy responses, the Bundesbank was quick to reiterate its opposition to central bank bond buying. (This has led many to suggest that the Germans (EWG) haven't made any changes to their "just say nein!" policy.) The Journal also said that one compromise would be for the ECB to announce its intention on Thursday to buy more bonds and take other measures, without actually implementing them at this time.
Ok, with our Fed/ECB expectations out of the way, now let's turn briefly from the subjective review of what Bernanke/Draghi may or may not do to the objective readings of our major market models. It is interesting to note that while the global macro outlook remains as negative as ever, our market models have improved and suggest that if the bulls can survive the latest round of big, bad events and the HFT/Algo-induced responses, the stock market might actually have some room to improve.
Yes, I know the global economy is slowing. And yes, I'm aware of the fact that earnings (and especially corporate revenues) are also pulling back. Yet at the same time our Market Environment Model, our Weekly Big Picture Model, as well as our State of the Tape Models are all positive at the present time. Cutting to the chase, this suggests that the overall backdrop for the stock market may not be as bad as the bears have led us to believe.
So while we wait, it is important to note that if either Messer's Bernanke or Draghi disappoint traders, the latest rally would likely be reversed - in a hurry. So, stay tuned as this is certainly going to be interesting.
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Positions in stocks mentioned: SPY