Today Federal Reserve Chairman, Ben Bernanke, spoke – and the markets LOVED what he had to say. At least in the short term.
Bernanke surprised the market by saying the Fed wouldn’t begin tapering their bond buying. So at least in the short term, the Fed will continue pumping $85 billion per month of funny money into the bond markets. This will keep interest rates artificially low for at least a few months. In a matter of minutes the S&P 500 went from being down 0.2% to being up 1.2%, ultimately finishing right about there too.
There is some irony though regarding this big pop in the markets: The reason the Fed didn’t want to stop its bond buying program is because it thinks the economy is actually weak!
Go figure. The US stock market is back to all time highs, and is almost surely going to finish the year up (which would mark 5 consecutive calendar years). In my opinion though, I think the Fed is right. The economy is better today than it was 5 years ago, but not nearly to the tune the stock market has shot up.
It smells bad to me, and I can’t help but think that at some point in the fairly near future (i.e., within 2 years) there will be another big drop for stock investors. Scary part is, this current rally is happening on very, very light volume. So it’s the average Joe, small investor (non billionaire or billion dollar money manager) that is pushing stocks up. The big guys/gals are just waiting for a good time to take profits, then drive the market down, force the small investors to then panic sell at a loss – so the big investors can swoop back in and buy low.
That said, it’s still important to get while the getting’s good. Each little drop this year has been minor and all of them investors should have held through. Bonds are still down for the year, but now up more than 2% from their low a few weeks ago. With the Fed continuing to pump money into the economy and keep interest rates down, bonds can’t go down much further. Eventually the Fed will let of the gas, and when that happen bond investors will want to get out of harms way. For now though, there’s no reason to panic at all.
If you’d like a little more info on where I think the market is going from here, check out today’s market update video. It’s just 8 minutes long and helps show visually what I just rambled on about in the paragraphs above :).