The markets went practically nowhere this week. That’s not to say it was a boring five days since first quarter earnings announcements delivered both good and bad news depending upon the sector while record highs in oil and gas kept traders on their toes. Yet, the real fireworks begin next week when the Federal Reserve Board meets on April 29-30. The markets have already factored in a quarter point cut in interest rates but that’s not the issue. The real question is will that be the end of monetary easing and what does that mean for investments?
The U.S. dollar has been showing a little strength this week while interest rates are up a tad as well. The smart money is betting that the Fed will cut rates as expected but at the same time signal an end to the easy money that the markets have relied upon since last September. That would do two things right away: strengthen the dollar and signal an end to lower rates in the bond markets.
I can see why they may be right. Inflation is climbing and at a faster rate. I predict (as I have in the past) an inflation rate north of 9% in the Producer Price Index before all is said and done. Commodities prices, which reflect inflation have climbed to historical records. Gas, oil and food prices have superseded the mortgage crisis as the leading economic issue among presidential candidates and that’s not good for the Fed’s reputation. They are, after all, charged with controlling inflation as well as keeping us all from falling down the dark rabbit hole of the credit crisis.
Bernanke is between a rock and a hard place in lowering rates any further. After all, the financial sector, after the Bear Sterns Bailout, seems to be, if not quite ambulatory, at least sitting up in bed right now. Sure housing numbers are still falling while foreclosures are escalating but at what point is enough, enough? Maybe we’ve reached it.
The hot money is already voting with their feet, fleeing gold, silver, agricultural and metals investments into financials and technology this week with gold now under $900/oz. The energy sector has held up however, with oil attempting to breach $120/bbl. while natural gas (the stealth energy component) has also held its own. To be fair, strife in Nigeria and the Gulf this week kept upward pressure on oil prices but my own short term target of 118/bbl. was reached. I would expect some pullback in the price of crude here (barring any additional political calamities) before trying for $128/bbl., my next target on the upside.
As for the stock markets, This week the index simply backed and filled as investors sold stocks with disappointing earnings and bought those that had surprised on the upside. I expect the S&P 500 has a bit more to go on the upside and will reach my target next week. From there, the markets are in the hands of the Fed. Depending upon the Fed’s decisions and statements, we will either roll over and test the lows again or move higher. I’m hoping for good news but am prepared for the worse. You should be too.