EmailStock market participants appear to be convinced that the Fed will come to the rescue if necessary. That belief provided support to the market yesterday and has stock futures steady this morning.
The Fed did not announce anything new yesterday. They indicated Operation Twist (Fed buying of long-term securities in place of short-term securities) will continue. That was expected and isn't a big deal in any case with long-term rates already extremely low.
More significantly, Fed Chairman Bernanke did not announce that the Fed will embark on another round of quantitative easing (expansion of credit through outright purchases of government bonds). He did, however, say that the Fed is prepared to act if conditions warrant.
In other words, if economic conditions worsen, the Fed will pump up credit and increase money supply to stimulate the economy. It is widely believed that an increase in liquidity through such action would boost stock prices.
There may now be traders hoping that the next employment report is bad enough (though not terrible) to prompt the Fed to act.
It isn't exactly ideal investing conditions when central bankers state that they are ready to help in case of a crisis - that still implies a crisis. Nevertheless, the risk-reward ratio improves if indeed the Fed and other central bankers can reduce the downside of any bad economic news or market shock.
New claims for unemployment for the week ended June 16 fell to 387,000 from 389,000 the prior week. Claims have been fairly steady in recent weeks. That implies that June nonfarm payrolls might post a gain similar to the disappointingly small gains of April and May.
The situation in Europe remains precarious and US economic trends worrisome. The stock market has bounced back nicely the past month, but as summer starts, there is still plenty of reason to expect choppy conditions for a few more months.
Founder and Chairman, Briefing.com
