Monday, July 29, 2013

Aging Bull Still Raging (excerpt)

The aging bull has turned into a raging bull so far this year. The S&P 500 is up 18.6% ytd, well ahead of last year’s 13.4% gain. Not bad for a bull that has been charging forward with only a few stumbles since March 2009. It hasn’t stumbled this year. There has been only one mini-correction, with the S&P 500 down 5.8% from May 21 through June 24.

Fears that the current bull market (2009-?) might be tracking the previous one (2003-2007) have abated as stock prices rose to new record highs this year, surpassing the previous record peak on October 9, 2007, rather than starting a bear market, as they did after the market peaked on that day in 2007. However, the year isn’t over, and there are some hurdles that could trip the bull during the fall. More likely is that stock prices will move sideways for a while before resuming their climb to new record highs in 2014. Nevertheless, let’s look forward at the upcoming challenges starting with the Fed.

The FOMC meets this week on Tuesday and Wednesday. Odds are that the statement released after the meeting will signal that the Fed will start to phase out QE following the next meeting, scheduled for September 17-18. To minimize adverse market reactions, the statement is likely to ease “forward guidance” some more. I wouldn't be surprised if the 6.5% threshold for the unemployment rate is lowered to 5.5%.

The WSJ’s ace Fed watcher, Jon Hilsenrath, confirmed this possibility in a 7/25 article titled, “Up for Debate at Fed: A Sharper Easy-Money Message.” He observed that Fed Chairman Ben Bernanke “suggested at his June press conference that the Fed might lower that 6.5% threshold for unemployment, which was set in September. Such a move would drive home to markets that short-term interest rates will be low for a long time.” Another option would be to state that “short-term rates won't rise if inflation falls below some threshold, perhaps 1.5%. Mr. Bernanke has already suggested as much.”

Bernanke and other Fed officials have argued that the official unemployment rate isn’t measuring extensive “underemployment.” The number of people working part-time for economic reasons remains very high at 8.2 million.

Today's Morning Briefing: Looking Forward. (1) From aging to raging bull. (2) Challenges during the fall season. (3) Tighter QE and easier forward guidance? (4) Sequester II-X ahead. (5) Threatening to shut down the government again. (6) Obamacare needs lots of young and healthy members, who don’t want it. (7) For some employees, working part time is as good as full time. (8) Draghi’s OMT could be challenged in Germany. (9) China MSCI is cheap for lots of good reasons. (10) “Fruitvale Station” (+). (More for subscribers.)

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