Stocks Decline after Bernanke’s Comments; Dollar Strengthens

Market Digest – Week Ending 6/21

Summer has arrived, but the mood over the last few days was anything but sunny. Global stocks increased ahead the FOMC meeting, only to sharply decline following official statements from Bernanke. This time the selloff was broad-based spanning virtually every asset class. Bonds, commodities, gold and real estate were all down. International markets were hit particularly hard as a weak manufacturing report fueled fears of a slowdown in China. The dollar strengthened.

Weekly Returns:

S&P 500: 1,592 (-2.1%)

MSCI ACWI ex-US: (-3.3%)

US 10 Year Treasury Yield: 2.53% (+0.40%)

Gold: $1,294 (-6.9%)

USD/EUR: $1.313 (-1.6%)

Major Events:

  • Monday – Better than expected economic reports on US housing and New York area manufacturing lifted stocks.
  • Tuesday – US consumer-price index increased 0.1% in May, pointing to continued softness in inflation readings.
  • Tuesday – Despite ongoing differences, Russian President Vladimir Putin agreed to sign a G-8 declaration calling for a transitional government in Syria.
  • Wednesday – Ben Bernanke spooked markets by stating the Fed may start winding down its monthly bond purchases as early as this year.
  • Thursday – US existing home sales increased more than expected in May. 
  • Thursday – A preliminary gauge suggested Chinese manufacturing contracted at a faster pace in June.
  • Friday – St. Louis Fed President James Bullard said central bank asset purchases may increase if inflation slows further.

Our Take:

Mr. Bernanke can’t seem to speak without agitating financial markets. His comments on Wednesday sparked a global selloff that drove the largest single day stock decline in 2013. Specifically, he stated the economy is showing signs of improvement and that monthly bond purchases could start tapering off this year, potentially ending in mid-2014.

So why the severe market tantrum? Clearly, investors expected the Fed’s bond purchases to last a bit longer, or at least taper off at a slower pace. But this is akin to a child wanting more candy for the immediate sugar rush. In certain situations it can make sense, but it’s not a sustainable form of energy. And when you take that candy away, the child will inevitably cry and stomp their feet.

The same is true for the US economy and the ongoing stimulus party. It simply can’t last forever. More importantly, investors seem to be ignoring the obvious. Any potential wind-down will be predicated on improving economic growth and lower unemployment. This is a good thing. Why would we not want to transition from an artificially supported economy to one supported by stronger organic growth?

Moreover, there is still no official decision as to whether bond purchases will end. Should conditions deteriorate from here, we would fully expect current stimulus measures to remain in place (barring any unexpected uptick in inflation). The Fed has even stated it does not expect to increase short-term rates until 2015.


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