August 26, 2012
We're back to the familiar pattern.
Your investments probably drifted lower last week — not based on the underlying economy or business, but rather on second-guessing what the Federal Reserve and central bankers in Europe might have up their sleeves.
The uncertainty probably is one reason why individuals have continued pulling billions out of stock funds despite the market's 10 percent surge since June. The U.S. economy continues to drag along — not horribly, but without vigor. Friday, durable goods orders data for items other than airplanes disappointed economists, falling 3.4 percent for the last month rather than the 1 percent that had been anticipated. In other words, sales of items like machinery have sagged, probably pointing to coming disappointment in the manufacturing sector.
A Philadelphia Fed report said factory orders have been down for four consecutive months. And companies have been taming expectations. For example, Illinois equipment maker John Deere lowered its profit forecast and noted slowing sales in Asia and Latin America.
But new-home sales climbed 3.6 percent in July, and the economic numbers have been just strong enough to spur significant debate about whether the Fed will try to sweeten the markets with more sugar. St. Louis Fed President James Bullard said in a CNBC interview Thursday that he doesn't think there's enough weakness to warrant stimulus. So stocks plunged. Then Chicago Fed President Charles Evans said the economy still needs a lift. And that helped stocks rally Friday, even though investors are increasingly worried that the Fed can't do much more to help.
In fact, it was assurances on that very issue that helped power the Dow Jones industrial average's 100-point climb Friday. A letter from Fed Chairman Ben Bernanke assured the head of a Congressional panel that the Fed still has arrows in its quiver and that Bernanke would use them if needed.
The question, of course, is whether the Fed will shoot some of its arrows in September when it meets. Some investors think the Fed will wait until after the election to avoid looking political while also awaiting more economic signals.
Investors are expecting hints when Bernanke speaks at the Fed's retreat at Jackson Hole, Wyo., on Friday. Statements at the annual event often move the stock market.
If Bernanke cools expectations on stimulus, stocks are likely to fall. But investors also will be listening closely to comments from European Central Bank President Mario Draghi at the retreat. A few weeks ago Draghi got optimism flowing throughout global stock markets when he suggested the European Central Bank would buy bonds and help struggling countries such as Spain escape financial problems.
Still, that's easier said than done, as investors learned once again this week as European leaders finished summer vacations and started to make statements again about their willingness to support bailouts. Gold investors clearly think stimulus is coming. Gold has climbed from $1,552 at the end of June to $1,670 Friday, at least partly on the assumption that the fix is in to print more money.
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