MV Weather Report: FOMC Says Worst Is Over -- But This Is Just the Eye of the Storm
Rain or shine, we review the day's biggest stock stories.
The story of the day (or lack thereof) was the FOMC. The Fed held rates steady and made no changes to the capital purchase program, though it did extend it through October.
One slight change was the mention of "sluggish income growth," which was used to describe why household spending remains constrained. Economic activity is "leveling out," and "the pace of economic contraction is slowing." Some thought the Fed would follow in the Bank of England's footsteps and increase the capital purchase program but this didn't happen.
The Fed's language shows it believes the economy is stabilizing, and that the worst is certainly over. Today on the Buzz and Banter, Mr. Practical gave his thoughts on the state of the economy.
- "Libor markets have returned to normal (we are guaranteeing this market).
- "Swap spreads have returned to normal (we are guaranteeing this market).
- "Housing starts and prices have stabilized (the US government is providing 15% tax credits, effectively paying the down payment for first time home buyers).
- "Car sales are seeing signs of life (the US government is providing cash for clunkers).
- "The US economy has stabilized because the US government has effectively become almost half of the US economy. But stimulus has been shown to have a zero multiplier: stimulus comes from either borrowing or transferring wealth from taxpayers, so every dollar eventually is taken back. Tax increases tend to have a minus 3 multiplier: tax increases eventually reduce growth by three times the increase.
- ""Green shoots" will wither away very quickly as the US government has effectively become a very large part of the economy. That is temporary. Without the ability to generate more credit, growth will turn negative. "
Mr. Practical made some great points. That being said, investors are still taking the market higher here. For the day, the S&P 500 closed higher by 1.15%, to 1005, off the day's high of 1012. I would note that the majority of the market's move came during the first hour of trading; post-FOMC, it was chop-and-slop.
One thing that stuck out to me about today's session was the leaders of today's rally lead the initial rally months back, Goldman Sachs (GS), Apple (AAPL), Amazon (AMZN) all had strong days. Could be something, could be nothing but another leg would fit with the Head and Shoulders pattern discussed last night.
As for tomorrow it will be a data dependent as the Export Prices, Import Price, Initial Jobless Claims, Retail Sales and Business Inventories are all reported before 10:00 am. Wal-Mart (WMT) also reports earnings before the bell.
I'm beat, have a great night!
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