Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
The Tapering Game Continues
In Wednesday’s FOMC meeting, the Fed cut bond purchases by another $10 billion (to $45 billion) and remained committed to eliminating purchases altogether via “measured steps” leading into October 2014. Of course, this plan depends on the economy accelerating from current levels in a “self-sustained” manner. We have our doubts on that score.
High on our list of concerns is the economic data, which, following the widely expected post-weather bounce in March, remains unimpressive. April’s non-farm jobs report released Friday is a case in point. Though sporting a solid headline number of 288,000 (vs. 218,000 expected), the number was weakened by the inclusion of 234,000 assumed jobs based on the birth/death model (which are fictitious) and the removal of 806,000 persons from the labor force. The latter was largely responsible for the record-low participation rate of 62.8% and the sizeable drop in the unemployment rate from 6.7% to 6.3%.
Despite the data, however, we imagine that the Fed will find a way to push the “tapering” agenda for as long as humanly possible. Interest rates (for mortgages and Treasuries) are being viewed by the Fed as an obstacle to growth. Though the Fed has not sounded any alarms over the subject, it has been quite active – bordering on panic – in the search for ways to manipulate rates lower. This is evidenced by the most recent regulatory proposal that would tie executive compensation to fixed income investments (i.e., Treasuries).
Regulatory matters aside, we still believe the greatest hope for lower rates – or, better said, another refinance boom – is a stock market correction that would result in funding the Treasury market. Stock bulls may not know it, but they may be engaged in a dangerous game of high stakes poker with the Fed, with the Bulls aggressively calling the Fed’s bluff at the moment.
Stocks began to leak following the Fed’s decision to taper, with some of the high-flying names under pressure once again. If it weren’t for month-end performance gaming (which I overlooked in last week’s market prognostications), stocks could have fared much worse.
That said, next week’s market action may tell if this is a “sell in May and go away” scenario at work. Away from stocks, Treasuries and gold spiked higher on Friday in reaction to an uprising in the Ukrainian city of Odessa. The dollar finished softer, and may continue to slide next week on the back of recent central bank abstentions regarding stimulus (QE) enhancements in China, Japan, and the EU.
Best Regards,
David Burgess
VP Investment Management
MWM LLLP
