Market Digest – Week Ending 8/24

in Market Commentary by

[dropcap]I[/dropcap]nvestors focused on anticipating outcomes in the next round of the European debt crisis, but no consensus emerged. German Chancellor Merkel announced support for keeping Greece in the Euro, snubbing political opponents who prefer to rid the currency of its most indebted member. U.S. economic reports for the week fell short of most expectations, sapping momentum from more positive results in recent weeks. Minutes from the July Fed meeting suggested the central bank is “likely” to engage in additional stimulus measures unless there is a substantial pickup in growth. The speculation of new Fed purchases led Treasuries higher. The price of gold and oil also increased.

Weekly Returns

S&P 500: 1,411 (-0.5%)

MSCI EAFE: (-0.4%)

U.S. 10-Year Treasury Yield: 1.69% (-0.12%)

Gold: $1,670 (+3.3%)

USD/EUR: $1.251 (+1.5%)

Major Events

  • Monday – In prepared comments, the ECB and Germany dismissed speculation that the ECB was preparing to cap government bond yields.
  • Tuesday – Dell computer reported disappointing earnings and revised its full-year forecast downward.
  • Wednesday – The Fed released the minutes from its July meeting, including language suggesting more stimulus in the form of bond buying is planned.
  • Wednesday – Existing U.S. home sales in July rose 2.3 percent, but fell below median expectations.
  • Thursday – German Chancellor Merkel said she wants to keep Greece in the Eurozone, but that Greece must honor its austerity commitments.
  • Friday – Ben Bernanke said he saw “scope for further action,” increasing speculation the central bank will take new action to spur growth.

Our Take

Don’t fight the Fed.

The familiar Wall Street adage has perhaps never been more relevant. The previous Fed chairman, Alan Greenspan, was known for working in mysterious ways and rarely telegraphed his intentions. Bernanke has tried to swing the pendulum the other direction, and usually offers fairly direct clues about future actions. Perhaps due to a multi-decade immersion in Ivy League academics, interpreting the wording of such clues remains challenging, but the directional message is usually evident.

This week the message came twice — once in the release of minutes from the July 31-August 1 Fed meeting and once in a letter written from Bernanke to Darrell Issa, chairman of the House Oversight and Government Reform Committee.

From the minutes:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

And from the letter:

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.”     

A strong August jobs number may keep the QE3 (more bond purchases) on ice, but the Fed wants high asset prices (homes and stocks) and low interest rates. Don’t bet too heavily against it.

Image used under Creative Commons by Flickr user Medill DC.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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