Was Bernanke’s Speech a Game Changer?
Aug 30, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Fed Chairman Ben Bernanke spoke Friday about the state of the economy and the role of the Federal Reserve. His basic credo was that even though the economy still is lagging, not to worry! The Fed has the tools to carry us through. Such tools might include increased monetary easing. While the bond market dropped somewhat on this news, the stock market finally staged a rally. The Dow surged almost 165 points, having its’ best day in a month. Was this the impetus for the long awaited rally?
Maybe, but I doubt it. I’m still of the opinion that the market is going to churn around, much like it has for most of the year. Despite the rally, the Dow is still down about two and a half per cent for the year. In addition, I still don’t see many positive signs of economic growth. For example, Intel (The worlds’ biggest chip maker) warned Friday that demand was slackening, and that third quarter revenues were going to be below expectations. The Feds’ next move will hinge on this weeks’ key economic data, especially Fridays’ unemployment number. Even President Obama has conceded that the economy was not growing as fast as was needed, and that he had no “magic bullet” to change things. Sobering words indeed.
Meanwhile, the yield on the S and P is currently 2.6%. That doesn’t sound like much, but that’s actually greater than the yield on ten year treasuries. I would have thought that this would make stocks appear cheap vis a vis bonds. However, as long the economy continues to slump, investor sentiments continue to favor the safety of US treasuries. Personally, I don’t see the great benefit of lending my money to the United States for ten years at 2.5%. It will be interesting to see what happens going forward.
