5.24.13 - Week in Review

Bernanke's speech creates a turbulent week for stocks as well as an uncertain outlook moving forwards. Bernanke said that the Fed will continue the current pace of $85 billion of purchases every month, at least until the unemployment numbers get closer to or hit 6.5%. Currently at 7.5%, there is still a sizable improvement to be made. Speculation persisted throughout his speech and the markets adjusted accordingly. As fears set in that QE would soon end, the highs of 1,690 gave way to the pessimists, finally reaching 1,648.82 during the Friday afternoon session after regaining some lost ground.

US Durable Goods report came in much better than anticipated for the month. A sign of resilience and growth of the economy came in the form of the US durable goods report, as consumer spending on goods came in at 3.3%, more than twice the amount expected by economists polled (1.5%). Although not a sign of "rip-roaring strength", Stephen Stanley of Pierpoint Securities in Stamford, CT, said that it was indeed "better than expected." The lower expectation of 1.5% came in part from the increased taxes in January as well as widespread budget cuts in March, but the strong consumer spending gives many the impression that the US is in a good position globally. Other data tempers the ideas that the global recovery is well underway, as shipments of core capital goods fell 1.5% as well as shipments of capital goods in the defense sector fell 5.6% in April.

Gains in the Nikkei 225 are trimmed by profit seeking investors. The Japanese stock market dropped over 1,100 points in a day, the largest point drop since 2000. Initial concerns of a global pullback in equities were exacerbated by losses of 2.1% in other markets such as the London FTSE-100, the French CAC and the German DAX. These events are believed to have been the efforts of profit seeking investors closing out long positions instead of fears about the global economy, although it is worth noting that we are indeed in a global slowdown, as noted by the seven month low May PMI report coming from China's HSBC.

FOMC Minutes show division in the ranks of the Fed. Although Bernanke's speeches have been eerily consistent, other members of the Fed have dissenting views on the necessity of QE and ideas as to when it should end. These dissenters spooked the bulls into the resulting drop in the S&P 500, even though their opinions matter little in the grand scheme of things. Speculation into the true meaning behind the words of Bernanke has once again proven to be the problem, as investors seem scared and uncertain. For good reason they are uncertain, in the released minutes records of ideas ranged from immediate tapering of the QE program to another participant advocating for the increase in asset purchases. Notably, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”