MarketView for March 26

 

 

Summary 

 

The S&P 500 index recovered from its worst week so far this year to retake a four-year high on Monday after Federal Reserve Chairman Ben Bernanke signaled supportive monetary policy will remain even though the job picture has begun to improve. The Dow Jones Industrial Average received its biggest push from IBM, which closed up 1.1 percent at $20.77

 

Bernanke's comments came as the Street tries to determine what the ongoing effect on a nearly six-month rally in stocks will be given the now distinct possibility that further quantitative easing, or QE3, from the Fed could now be a real possibility. Nonetheless, keep in mind that the S&P 500 index fell 0.5 percent last week, a relatively minor decline that was still the largest weekly slide since the final week of December.

 

In his talk, Bernanke said that the economy had to grow more quickly if it was to produce enough jobs to continue to bring down the unemployment rate.

 

"Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Bernanke said.

 

The S&P 500 is up 25 percent since the end of September, mostly on optimism about the pace of economic growth. With stimulus from the Fed and an improving economy, the climate for stocks is even friendlier.

 

Meanwhile, Bob Doll, BlackRock's vice chairman and global chief investment officer, was quoted as saying that there is still a lot of cash on the sidelines looking for a pullback, and that he suspected that Ben Bernanke's comments stoked the fire, sending more people into the equities markets.

 

In addition, hedge funds that have been underinvested in stocks could be doing some last-minute window dressing by adding winners in the big rally to their portfolios. As strange as it may seem, financial stocks have led the rally, though almost all the S&P 500 sectors will likely post gains for the quarter.

 

Data on Monday showed pending home sales fell 0.5 percent in February, according to the National Association of Realtors.

 

Lions Gate Entertainment Corp rallied 4.5 percent to $15.18 after the strong opening of its film "The Hunger Games," which made $214 million over the weekend globally.

 

BATS Global Markets on Sunday apologized for a system failure that caused shares in its own initial public offering to erroneously trade for less than a penny on Friday and resulted in Apple’s shares being temporarily halted.

 

About 6.2 billion shares changed hands on the three major equity exchanges as compared with the daily average for 2012 of about 6.86 billion shares.

 

We Need to Grow Faster

 

The economy needs to grow at a faster pace if it is going to bring down the unemployment rate, Federal Reserve Chairman Ben Bernanke said on Monday, defending the central bank's policy of very low interest rates. While he offered no indication that the Fed is keen to embark on a third round of bond purchases, Bernanke also made clear the Fed is in no rush to reverse course after responding aggressively to a deep recession.

 

Bernanke said the recent decline in the jobless rate, which dropped to 8.3 percent in February from 9.1 percent last summer, was "somewhat out of sync" with the rather modest pace of economic growth.

 

Bernanke was quoted as saying that, "To the extent that this reversal has been complete, further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies."

 

GDP grew 3 percent in the fourth quarter, but is expected to have slowed to just below 2 percent in the first three months of this year. For all of last year, it grew only 1.7 percent, which would normally be too slow to move the unemployment rate lower.

 

Bernanke said the recent drop in the jobless rate could reflect an effort by businesses to recalibrate their payrolls after unusually heavy job cuts during the recession. If this is the case, he said, progress may stall.

 

After its last two policy meetings, the Fed said it would likely keep rates near zero at least through late 2014. However, upbeat economic signs, including solid employment growth, have led investors to anticipate an earlier move. Last week, interest rate futures showed dealers expected the first rate increase in July 2013. Bernanke's speech appeared aimed at pushing back against those expectations.

 

Bernanke reiterated his concern about long-term unemployment, which he said could cause workers' skills to atrophy, and he argued against the notion that much of the problem was due to structural factors that monetary policy could not address.

 

"The continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well," he said.

 

Bernanke has made several public appearances in recent days, including giving a series of lectures to college students. This is part of an effort to burnish the institution's public image, battered in the wake of the financial crisis.

 

Bernanke said much of the improvement in the labor market since the summer of 2009, when the economy began emerging from the deepest recession in generations, was due to a decline in layoffs rather than a robust pick up in the number of employers taking on new workers.

 

"To achieve a more rapid recovery in the job market, hiring rates will need to return to more normal levels," he said.

 

Bernanke said wage growth is too soft to present an inflation risk and points to a labor market that was still operating below its potential.

 

"Wages are not a major concern for inflation," Bernanke said in response to questions from business economists. "We still need to be concerned about commodity prices and other factors but wages at this point remain quite subdued."

 

Plosser Says Three Percent

 

Charles Plosser, president of the Philadelphia Fed, said on Monday that economic growth in the United States would be about 3 percent in 2012 and 2013. Plosser also said he believed the country’s jobless rate would fall to 7.8 percent by the end of 2012. The U.S. jobless rate stood at 8.3 percent in February.

 

However, Plosser was also quoted as saying that the world's central banks should not have unfettered ability to purchase assets because that violates the traditional separation of monetary and fiscal policymaking and can allow governments to inflate away debts.

 

Instead, the Fed and other central banks should have clear limits on how much - and in what way - they can expand balance sheets, so as to avoid problems associated with the unprecedented policies adopted in the wake of the global financial crisis and recession, Plosser said.

 

The central bank has nearly $3 trillion in mostly long-term Treasuries and other securities on its balance sheet after two rounds of so-called quantitative easing since 2009. The European Central Bank's balance sheet has swelled even larger, to more than 3 trillion euros ($3.98 trillion), as it also took steps to revive the euro zone economy.

 

"Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow," Plosser said.

 

"Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies," he said.

 

Plosser, an outspoken policy hawk who opposed the Fed's last round of bond-buying, has said repeatedly that the central bank should do no more to stimulate the economy, which has shown signs of strength in the last few months. Still, Chairman Ben Bernanke and other Fed policymakers have left the door open to another round of large-scale asset purchases if needed.

 

Plosser, who does not have a vote this year on the Fed's policy-setting committee, also criticized the Fed's purchases of mortgage-backed securities as blurring the lines between government fiscal policy and the Fed's monetary policy.

 

The committee's statement in January that it wanted to return to an environment in which interest rates are the primary tool was a good first step to returning to more normal policymaking, Plosser said.

 

"I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times," he said.

 

Pending Home Sales Index Falls

 

Contracts to purchase previously owned homes declined during the month of February, suggesting a loss of momentum in the housing market after recent signs of improvement. The National Association of Realtors said on Monday its Pending Home Sales Index, based on contracts signed in February, slipped 0.5 percent to 96.5. Signed contracts for home re-sales usually become actual sales after a period of a month or two.

 

The report was the latest in a series to suggest a pause in the tentative housing market recovery in February and a weak start to the spring selling season. However, given that contracts were up 1.5 percent between January and February, there is a chance that the home re-sales number could move up in March. The actual existing home sales numbers still need to rise a bit in order fully to catch up, but the overall impression is one of a pause.

 

Data last week indicated that sales of previously owned homes fell in February, but remained the second highest since May 2010. Other reports last week also showed declines in home building activity and new home sales in February.

 

However, permits to build homes approached a near 3-1/2 year high in February, and both prices of new and previously owned homes rose from a year ago. One possible reason is the fading gains realized from the unseasonably mild winter weather.

 

In addition, the housing market continues to face headwinds caused by the overall oversupply of unsold homes, particularly foreclosures, which are depressing prices. Stringent conditions to qualify for a home loan are also an obstacle. Finally, about a third of contracts are canceled every month, according to the NAR. Contracts fell in three of the four regions last month, but rose 6.5 percent in the Midwest.