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Fed to Remain “Accommodative”; S&P 500 Jumps 3%

The S&P jumped 3% and closed the week at a record high. Most of the gains followed mid-week comments by Fed Chairman Bernanke that the economy still needs “highly accommodative monetary policy for the foreseeable future”. His comments also led to a drop in the dollar and a rally in international equities. Bonds and gold also rose.

Weekly Returns:
S&P 500: 1,680 (+3.0%)
FTSE All-World ex-US: (+3.5%)
US 10 Year Treasury Yield: 2.58% (-0.15%)
Gold: $1,284 (+5.2%)
USD/EUR: $1.307 (+1.9%)

Major Events:

  • Monday – In Egypt, at least 53 people were killed and more than 400 wounded in a clash between the military and supporters of deposed president Mohammed Morsi.
  • Tuesday – Alcoa began earnings season with better than expected results.
  • Tuesday – Kroger announced it will buy Harris Teeter for $2.4 billion.
  • Wednesday – The Fed released minutes from its last meeting showing a split in the thinking about tapering bond purchases. After market hours, Bernanke tried to assure investors that the Fed will remain “accommodative” for some time.
  • Friday – JP Morgan and Wells Fargo each reported earnings above consensus estimates.
  • Friday – UPS estimated second-quarter profit below market expectations, citing international customers shifting from aircraft to slower but cheaper ships.

Our Take:
Bernanke has been so accommodative for so long, it was not surprising to see him backtrack a bit from last month’s suggestion that bond buying could be aggressively tapered later this year – especially considering the strong reaction it caused in the bond markets. By design or not, he has successfully put himself in a place where he can now chop bond buying this year or not, and the markets should be somewhat prepared for both scenarios. Usually, creating a state of confusion is a negative for asset prices, but it this case it may actually provide some flexibility and work fairly well.

Earnings season kicked off this week with mixed results. The stage is set for fundamentals to drive stock prices to a larger degree than in recent years, whichever path the Fed chooses.

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