Making Money Alert
A Questionable Future
08/24/2011
Stocks got pounded to the tune of 419 Dow points last Thursday, and the heavy selling came after more news out of Europe that the region’s financial crises could infect banks all over the globe. Add to that the news here at home showing a weak economy, a weak housing market, weak employment numbers and falling bond yields, and you have more fuel stoking the bearish flame.
Then on Tuesday, the trading floor on the New York Stock Exchange got shaken up by a rare East Coast earthquake, but that didn’t stop the bulls from producing a 300-plus point Dow surge. So, what should we make of the crazy market volatility we’ve seen over the past several weeks? Well, I think this is a clear sign that the future of the U.S. economy is still very questionable. Until some of the biggest questions looming out there are answered, I think we are likely to get more volatility of the type that we’ve seen over the past few weeks.
Now, we are liable to get a hint of at least one of those answers on Friday. That is the day when Federal Reserve Chairman Ben Bernanke is due to deliver a key speech at the annual Jackson Hole, Wyo., Fed conference. Wall Street is betting that Mr. Bernanke will give us some type of substantive hint about a possible quantitative easing, part three, or QE3, in the works. Some people think the Fed already has put QE3 in place via its pledge to keep interest rates at current levels through the middle of 2013, but Wall Street is addicted to stimulus programs and would like to see an even bigger move.
Like a drug addict looking for a fix, Wall Street loves stimulus money, and that’s what it’s angling to get a dose of on Friday. Recall that last year, the Fed’s $600 billion buying scheme, or QE2, was the catalyst for a huge rally in both stocks and commodities. If we get some kind of promise along these same lines from the Fed, it could cause stocks to mount a sharp rally.
The other unknown clouding our questionable future is what kind of policy programs are going to be coming from President Obama and his opposition in Congress. Mr. Obama plans to make a speech outlining his plan to create jobs and juice the economy on Sept. 5. What’s contained in that program likely will be watched -- and reacted to -- closely by traders.
I expect the opposition in the House of Representatives not to make things easy for the president, so getting any kind of plan implemented may be a very tough task. In the face of this potential gridlock, stocks really could take a pounding similar to what we’ve seen so far since we climbed to our July highs.
I think the best play here for investors is not to jump in front of either the Bernanke bus, or the Washington budget battle. Being too exposed to stocks can get you killed, and there’s simply not enough upside out there to chance it. If you are invested heavily right now, my suggestion is to pare down your positions on up days, and then pull up a chair under the umbrella of a high cash position.