Can The Fed Save The Market?
Well, this hasnt been the May most investors hoped for. In fact, its been pretty much an unmitigated disaster.
For a good point of reference on how painful May has been so far, just look at the S&P 500. The bellwether index has essentially gone from 1,400 to 1,300 in two weeks. Ouch.
The pummeling is mostly driven by Europe and the re-igniting of the debt crisis. This time, the spark came from elections in Greece and France. And, were once again teetering on the brink of a full-blown crisis.
Heres the thing
Over the past couple years, when market turmoil starting getting out of hand, the Fed stepped in to save us.
They used traditional methods, such as interest rate cuts and discount window lending. Plus, they employed a whole new set of tools with fancy names like quantitative easing and Operation Twist.
Now, the Feds actions havent had obvious effects on the economy as a whole but they certainly boosted asset values. For several reasons I wont get into here, investors have reacted very bullishly to Fed intervention.
But can they do it again? Can the Fed save the stock market one more time?
From what Ive read, the Fed is considering renewing Operation Twist rather than focusing on another round of quantitative easing.
That means theyll be selling short-term bonds and using the proceeds to buy long-term issues. The goal is to push down long rates so things like mortgage rates remain historically cheap.
While thats good news for real estate buyers/investors or those looking to refinance, it hasnt been as good to the markets as pure quantitative easing (such as outright bond and mortgage backed securities purchases).
However, quantitative easing has drawn the ire of politicians. There have been many vocal critics.
Meanwhile, Operation Twist has pretty much been left alone in terms of criticism. Thats because it doesnt involve printing new money, just shifting it between existing assets.
In other words, the Fed may be caught up in the politics of an election year. So, its very possible we wont see any more QEs before the election.
Thats the bad news. Whether or not you agree with quantitative easing, you cant argue about its impact on stocks. And the global economic story isnt getting any better.
Heres the silver lining
It looks like the Fed believes more action is needed to help the economy. Even if that help comes in the form of Operation Twist, its better than nothing. Lower long-term rates are useful for many people particularly those looking to buy or refinance their homes.
Unfortunately, we might not see the bullish action in the market weve come to expect from the QE programs. You can thank politics for that. This time around, stocks may have to get a boost from some other source.
Yours in profit,
Gordon Lewis
Category: Breaking News
