Is The Party Over For Penny Stocks?
In a surprise move, the Fed released minutes from their March meeting early this morning. It was a surprise because the release was well before the regularly scheduled 2 p.m. time.
The early release most certainly threw investors for a loop before they even had a chance to down their morning cup of coffee.
But the bigger shock was what the minutes revealed about several committee members’ thoughts on Fed policy.
The minutes show that a few members pleaded their case to curtail asset purchases and potentially end them all together much sooner than expected. According to the minutes, these members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and stop them by year-end.”
So, the Fed might change its policy… what’s the big deal?
The big deal is that an end to the Fed’s policy of quantitative easing (QE) could derail the current stock market rally. You see, QE is the main driver behind the stock market’s historic rise this year.
Thanks to the policy the Dow is setting a new record high on almost a daily basis. And the S&P 500 just eclipsed its October 2007 intra-day peak today to set a new record intra-day high.
More importantly for penny stock investors, the Fed’s easy money policies have been a boon for small company stocks. The Russell 2000 index set an all time high in early January thanks to the Fed. And the index outperformed both the Dow and the S&P 500 in the first quarter with a gain of better than 12%!
In other words, if the Fed’s about to take away the punch bowl, it could mean stocks are poised to plunge.
The good news is…
The minutes came from a Fed meeting that was held before the March unemployment data was released. And that data show the unemployment rate is a long way from falling below the 6.5% level.
Only 88,000 new jobs were added in March. That’s less than half the number most economists were expecting. And it was the slowest pace of job growth in nine months.
What’s more, the unemployment rate came in at a hefty 7.6%!
That’s key…
You see, the Fed said in March it will keep interest rates near zero as long as unemployment stays above 6.5% and inflation is projected to run no higher than 2.5%. And it’s likely the Fed will continue QE until those conditions are met as well.
While the FOMC minutes might have given investors a brief scare this morning, I don’t think we need to worry about QE ending anytime soon. The labor market has to improve quite a bit more before Bernanke and Co. will even consider changing the policy.
And that means we don’t have to worry about the Fed killing the current stock market rally. While the rally could falter for other reasons, it won’t be due to an imminent change in Fed policy.
Profitably Yours,
Robert Morris
Category: Breaking News
