“Despite this lack of crisis, the Federal Reserve seems close to some further measures to try to aid the economy. These could include a forecast that the federal funds rate will not rise until 2015 or further purchases of mortgage securities or Treasuries. None of this is likely to help the economy at all – indeed the current batch of monetary easing measures have moved far into the realm of the counter-productive by starving consumers of interest income, feeding a bond-market bubble (and thus discouraging stock investing), undermining confidence, removing any incentive to borrow ahead of higher rates and discouraging lending by artificially depressing long-term interest rates. However, there is some hope that further Fed measures will be incremental rather than dramatic as befits an economy that is weak rather than in crisis. On Friday, Ben Bernanke may lay out the logic for further action at his annual Jackson Hole speech, although specifics will probably only be decided at the next FOMC meeting on September 12th and 13th.
Finally, markets will also be looking for some clarity from Mario Draghi on further steps the ECB might take to help stabilize peripheral debt. Like Mr. Bernanke, Mr. Draghi would be wise to wait to consult his ECB colleagues at their September 6th meeting, rather than front-running their decisions by any comments at Jackson Hole or elsewhere. Also, like the Fed, the ECB would dearly like to get a political commitment to sensible fiscal policy before providing further monetary stimulus. However, unlike the Fed, even without fiscal agreement, the ECB can really provide a boost to the European economy by aggressive purchases of peripheral sovereign debt. A key question for markets in the months ahead, is how willing they are to do that.
In summary, economic momentum is slow and policy is murky. However, one thing is clear. Over the last few years a huge pile-up of resources into cash and fixed income have left allocations at one extreme and valuations at the other, suggesting that many investors should still consider adding stock exposure to bond-heavy and cash-heavy portfolios.”
iShares S&P 500 (NYSEArca: IVV)
