Kevin Cook here for Steve for a few days as he travels…
The FOMC delivered what most market players expected Wednesday with an extension of Operation Twist. This is not full-on QE because the Fed will sell some bonds to buy others, swapping cash from shorter maturities to longer ones on the Treasury yield curve.
In this way, they do not add to their balance sheet with new Large-Scale Asset Purchases and thus don’t appear to be “monetizing” debt. That would be like printing new money and Bernanke and Co. want to save that ammo for a few uglier scenarios that could unfold:
1) Europe’s financial crisis gets worse and the “troika” cannot act in time to prevent serious contagion, let alone a deeper recession.
2) More weak US jobs data. My prediction, since the May payrolls, has been that if June and July come in under 100k net new jobs, “QE3 is coming.”
3) Congress drives the economy off the “fiscal cliff.”
Stocks took the Fed stance in schizophrenic stride, first selling off to new lows, then making new highs, and then testing the lows before settling near unchanged. Why all the senseless bluster? I think equity investors are digesting a lot of mixed messages here about how good the economy really is and when the Fed will feel compelled to act more aggressively, if at all.
But money managers were not surprised to see the Fed lower its GDP projections. And this brings us to the real point of investing: growth. Whether or not we’ve reached the point of “pushing on a string” with monetary stimulus, markets need to see tangible, self-sustaining economic growth take over at some point. Otherwise, corporate profit estimates for the S&P 500 will keep on slipping as sub-2% GDP gets priced-in.
The good news is that this is still a stock-picker’s market where you can still invest for relative safety and income during uncertain times.
Best,
Kevin Cook
Senior Stock Strategist, Zacks Investment Research
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