Markets Continue to Push Higher – August 17, 2012

Markets Continue to Push Higher

U.S. stocks finished the week higher for the sixth consecutive week, pushing the S&P 500 near a four year high.  Since June, the S&P 500 has rallied over 11% amid speculation that the ECB will initiate a sovereign bond buying program and assumptions that the Fed will add additional stimulus.  Building permits in the U.S. rose to a four year high and consumer confidence unexpectedly increased in early August.

Trading volumes have been very thin over the past few weeks as news out of Europe has been quiet as most European political leaders are on their summer leave.  Meanwhile, here in the U.S. Congress started their summer recess on August 6th and is not in session again until September 10th, although based on their outstanding lack of accomplishments it’s doubtful anyone will notice.

Will the Fed announce QE3?

Investors continue to clamor for additional monetary stimulus from the Federal Reserve and Fed Chairman Bernanke’s highly anticipated speech at the gathering in Jackson Hole later this month is likely to shed some light on the central banks plans.  The Federal Open Market Committee meets on September 13th and will likely announce any new stimulus at that time.  The FOMC will digest unemployment numbers from August and also GDP revisions as they drift closer to a possible QE3.   With the current batch of indecisive economic data we expect Bernanke to reiterate his last directive that the Fed is “closely monitoring the economy”.

However, the “pro-stimulus” sentiment is not endorsed by all economists as the so-called “Fed Hawks” continue to oppose any additional monetary stimulus.  Dallas Fed President, Richard Fischer continues to express skepticism about the efficacy of the Fed actions.  He believes that businesses already have ample access to cheap credit and remain reluctant to borrow, hire or invest for reasons nonaffiliated with Fed policies, including regulation and taxes.  While economist debate the real effects additional Fed stimulus will have on the overall economy in the long-run, empirical evidence suggest that investor’s cheer additional stimulus which typically pushes financial markets higher in the short-run.  We will continue to monitor these developments as they unfold and Bernanke’s speech in a few weeks should provide some insight on what to expect from the Fed next month.