Stocks rallied on a lack of bad news, and anticipation of a Fed announcement from Jackson Hole. In the end, Bernanke said little of significance and did not offer specifics for any new “QE3”, but the market rose anyway. A $5 billion investment in Bank of America by Warren Buffet also lent confidence to investors.
Treasuries and gold fell as money flowed back into the stock market and doubt increased over the idea that these asset classes really are “safe-havens” at current levels.
Wednesday – Gold drops 5% on fears of excessive valuation
Wednesday – Rebels in Libya take Tripoli.
Wednesday – US Durable goods report comes in above expectations.
Thursday – Announcement made that Berkshire Hathaway invested $5 billion in Bank of America, primarily buying convertible bonds.
Friday – Bernanke downgrades his view of economic growth, but said he still expects “a moderate recovery”. He said the Fed still has tools to spur growth but stopped short of announcing any new stimulus activity.
The market rallying in spite of a “QE3” announcement shows it probably isn’t needed and that the downside volatility from the previous weeks reflected fear of a “worst-case” economic scenario. While it is far too soon to see if the economy can avoid recession, it appears the stock market will be happy with even moderate growth.
Increasing volatility in gold and Treasuries is likely to persist as investors weigh the heightened risk associated with their lofty valuations.
Buffet’s investment in Bank of America, while made at very favorable terms, is a strong endorsement that the company will survive. This is bullish because the outlook for the bank has clearly had an impact on the overall market.