Soothing words from Federal Reserve Bank officials helped
settle investors’ fears last week, and U.S. stock markets moved higher. The Dow
Jones Industrials Average was up 0.7 percent, the Standard & Poor’s 500
gained 0.9 percent, and the NASDAQ rose by 1.4 percent.
Markets were more stable during the week, and the CBOE
Volatility Index (VIX), which gauges investors’ fear by measuring volatility expectations
for the coming 30-day period, fell by 2 percent to finish the week just below
17.
Economic data was mixed. On the negative side, U.S.
Gross Domestic Product (GDP) growth from January through March was revised
downward from 2.4 percent to 1.8 percent annually. On the positive side, U.S.
home prices gained more than 12 percent in April, which was the biggest
year-to-year gain since 2006. Home sales for May also were strong, reaching a
level last seen six years ago, according to the Denver Post.
Gold suffered another difficult week. Some believe
the sell-off is the result of changing expectations as fear that quantitative
easing might lead to hyperinflation, systemic collapse of the financial system,
or devaluation of currency have begun to ease.
U.S. stock markets delivered positive performance for
the quarter, as well. The Dow gained 2.3 percent, the S&P 500 was up 2.4
percent, and the NASDAQ rose by 4.2 percent. Year-to-date, the S&P 500 gained
more than 12 percent during the first six months of 2013. That was its best
first half of the year performance in more than a decade, according to Yahoo!
Finance.
This week, some experts foresee the possibility that
Fourth of July fireworks could be followed by a new round of market volatility
as investors and analysts try to use the June employment report to predict the
timing of monetary policy changes.
they say actions
speak louder than words, but that doesn’t appear to be the case when it comes
to Federal Reserve monetary policy. For some time, the Fed has been
communicating its intention to gradually cut back its bond purchasing program (a.k.a.
quantitative easing) while keeping the target fed funds rate steady. The target
fed funds rate is the interest rate at which banks borrow money from each other
overnight. The Fed has not taken action yet, but its words have caused nominal
bond yields to rise and inflation expectations to fall. Typically, these
changes are associated with tightening monetary policy.
The Fed’s words
also triggered significant market volatility. An article in The Economist suggested:
“Fed officials
are doubtless annoyed by the market’s skittish reaction to the idea of
tapering. In its view a more leisurely pace of buying does not amount to
tightening. Fed economists reckon the size of the central bank’s balance-sheet
is what matters most: so long as its asset pile is growing, policy is getting
looser. By the Fed’s estimates, halving the monthly rate of asset purchases
would be equivalent to trimming the federal-funds rate by five basis points per
month instead of ten.”
The gap between
the Fed’s perceptions and the markets’ response has been significant, and
investors and analysts are scrambling to interpret the economic tea leaves. Researchers
at Barclays Capital, whose work was cited in The Economist, have tried to determine how tapering may affect investment
assets. Since stock markets in emerging countries and high-yield bond markets
in the United States and Europe responded the most to the Fed’s quantitative
easing program, experts anticipate these markets also may respond the most strongly
when tapering begins.
Weekly Focus – Think
About It
“Fear
comes from uncertainty. When we are absolutely certain, whether of our worth or
worthlessness, we are almost impervious to fear.
--William Congreve, English playwright and poet
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