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Bernanke Speaks; S&P 500 Snaps Streak

Market Digest – Week Ending 5/24

Ben Bernanke played the party pooper for the first time in recent memory, indicating the pace of stimulus may be reduced as soon as “the next few meetings”. His comments snapped a four week winning streak for the S&P 500, which fell 1% for the week. Japan’s Nikkei index dropped over 7% on Thursday after reports of soft Chinese manufacturing activity and a brief rise in Japanese 10 year bond yields over 1%. The Japanese market was again volatile on Friday but managed a small gain. Treasuries declined for the week and the price of gold rose about 2%.

Weekly Returns:

S&P 500: 1,650 (-1.0%)

MSCI ACWI ex-US: (-2.3%)

US 10 Year Treasury Yield: 2.01% (+0.06%)

Gold: $1,386 (+2.1%)

USD/EUR: $1.293 (+0.8%)

Major Events:

  • Monday – A Bank of America economist said the actual trade surplus for China so far this year is about one tenth of the official number and is based largely on fake transactions.
  • Monday – A Senate panel found Apple paid no tax on tens of billions of dollars of overseas earnings, fueling the debate for a tax code overhaul.
  • Wednesday – Chairman Ben Bernanke said The Fed could take a first step toward reducing the bond purchase program at one of its “next few meetings,” but he cautioned he was reluctant to move prematurely or aggressively. “We are trying to make an assessment of whether or not we have seen real and sustainable progress in the labor-market outlook,” he said.
  • Thursday – A Chinese Purchasing Managers survey suggested slowing industrial growth, leading to a sell-off in Japanese shares, commodities and currencies tied to China.
  • Thursday – Sales of new US homes rose 2.3% from March, posting the second highest rate since 2008.

Our Take:

Whatever you think about Ben Bernanke, one easy thing to like is he usually does what he says. So, this week’s suggestions that the Fed could start reducing stimulus in the “next few meetings” leads us to assume it probably will. He also indicated that the first reductions will be modest and the program will be tapered down slowly. Again, we believe him.

Stocks dropped on Bernanke’s comments, but the 1% decline this week was pretty tame, especially when you consider the S&P 500 had climbed over 17% for the year and over 4% for the month. This tells us that the Fed reducing stimulus in a systematic way will not crash the markets. This doesn’t mean it will be smooth sailing for the rest of the year, but it does suggest a reduction in stimulus is not the thing to worry about.

China, however, could be. We’ve long been skeptical of official data from China and would not be surprised if the slowdown there accelerated rapidly. A freeze in the credit markets in China won’t have tremendous impact on the earnings of most US companies but it will hit commodity prices and producers as well as countries heavily reliant on demand from China.

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