Fed Creates Uneasiness in the Markets

This View is One of Many Advocated By the Investment Industry and is Presented for Your Review

Testimony by Ben Bernanke in Front of Congress Last Month Kicked Off a Wave of Speculation About When the Federal Reserve Will Begin to End Quantitative Easing. The Markets Have Also Been Reacting to Comments by Federal Reserve Regional Presidents. Investors Have Become Uneasy About the Levels Major Market Indices Have Reached Versus Valuations of the Market and the Perceived Potential that Quantitative Easing Could be Scaled Back. This Has Resulted In Market Reactions as Investors Have Been Watching the Release of Economic Reports That Can Impact Federal Reserve Decisions About Quantitative Easing.

Quantitative Easing Has Been the Fuel That Has Ignited the Markets Fire. It Has Propelled the Markets to New Highs. Scaling Back or Ending Quantitative Easing Calls Into Question the Premise Upon Which Investors Have Been Moving Money into the Markets. The 10 year Treasury Closed Friday June 7th at a Yield of 2.16%. This Yield Represents a Substantial Increase Since the Beginning of the Year. Investors Have Been Moving Money out of Bonds and into Equities Raising Bond Yields Despite the Fed’s Efforts to Keep Yields Low Buy Buying $85 Billion of Bonds per Month. These Bond Purchases Had Resulted in Lower Interest Rates Which has Benefited the Economy.

For Example, there has Been a Pickup in the Value of Residential Real Estate. The Case-Schiller Index Showed a Substantial Year Over Year lncrease as Home Prices Have Risen. Unemployment Has Risen to 7.6% and More People Have Begun Actively Looking for Work. The Release of the Beige Book as a Gauge of Economic Performance Shows Low to Moderate Economic Performance

At the Same Time the U.S. Economy May be in the Midst of Slowdown in the Second Quarter. Most Recently the ISM Survey Showed a Drop in Manufacturing. Wages for Those Who Have Jobs Have Stagnated as of Late. Personal Spending Has Fallen. Doug Kass in his Article “False Economic Dawn” on The Street.com Reported “The Personal Savings Rate is at a Five Year Low (2.5%). This May Restrict Second-Half Growth in Personal Consumption Expenditures, a Variant View Relative to the Market’s Consensus of Accelerating Growth. The May Chicago Manufacturing Index was Strong at 58.7 Compared to Consensus of 50 and 49 in the Month of April. This Was the Highest Reading in 15 months, Though at Odds with the Richmond, Philadelphia and Empire Indices as Well as Other Manufacturing Metrics Recently Released. When One Combines the Income and Spending Data With Other High-Frequency Data, the U.S. Economy is Growing More Slowly Than First Quarter 2013.” Projections for GDP for the Second Quarter Thus Far Have Been in the 1.6% to 1.9% Range. Much Less Than 1st Quarter GDP. First Quarter GDP Came out Initially at 2.5%. Then Was Revised Down to 2.4%. BankRate.com Reports the Rate for a 30 Year Mortgage Has Risen to 3.98% and the 15 Year Mortgage Has Risen to 3.15%. .

The Fed has Set Two Either or Parameters Under Which it Will Wind Down Quantitative Easing. Either an Unemployment Rate of 6.5% or an Inflation Rate of 2.5%. Consider Bill Gross’s Projection of a 2.5% Yield on the 10 Year Treasury by the End of the Year. There is Also Much That Has Been Written Lately About an Impending Market Correction. As Secondary Market Rates Rise there is the Potential for the Benefits Very Low Yields Have Provided Could Stop Producing Gains the Economy Needs for Example in Housing and Manufacturing.

Commodities Can Also be Considered a Proxy for an Expanding or Contacting Economy. Rising  Commodity Prices Can Signal an Increase or Decrease in Demand for the Products and Services They are Used to Make and Provide. For Example, Rising Oil and Gas Prices May Indicate a Pickup in Economic Activity as People Drive More, More Goods Need to be Transported and Business Needs for Them. Commodities May Also Contribute to Inflation. Rising Inflation Can Also Signal an Improving Economy as Demand Picks Up.  Commodities Prices are Not Governed Entirely by the U.S. but by Global Demand or Lack of it. As Examples; Gold and Silver Have Fallen Dramatically. Yet Natural Gas Has Risen this Year. Oil is Hovering at 96.14 as of the Close Friday June 7th. Goldman Sachs Sees the Bull Run in Commodities as Over as  Commodity Returns Trail Stocks. 

Last Year The Investment Advisor Projected the Yield on the 10 Year Treasury Would be Range Bound After it Hit its Low of 1.45% (Read A Word About the Economy). With the 10 Year Treasury Now Yielding 2.16% it is Possible the Yield on the 10 year Could Hit 2.5%.  Rising Yields Could Further Lower Gross Domestic Product (GDP), and Employment.  The Bureau of Labor Statistics (BLS) Reported the April CPI “All Items Index Increased 1.1 Percent Over the Last 12 months, the Smallest 12-month Increase Since November 2010. The Index for All Items Less Food and Energy increased 1.7 percent over the Span; This Was its Smallest 12-month Increase Since June 2011. The Food Index Rose 1.5 percent While the Energy Index Declined 4.3 percent.”

It has Also Been Poisted The Federal Reserve Will Need to See 4 Consecutive Months of Jobs Growth at the 200k Level Before it Will Consider Throttling Back on Quantitative Easing. Expect to See Continued Volatility Over the Next Several Months in the Stock and Bond Markets as Investors Continue to Watch Economic Reports. The Federal Reserve’s Next Meeting is Scheduled for June 18th, as is the Next Release of the CPI. The Investment Advisor Expects the Federal Reserve Will Hold its Hand Pat and Continue Quantitative Easing at its Current Levels as a Counterbalance to the Sequester.

For Further Questions or Concerns Contact The Investment Advisor.

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