Evan R. Guido
The Federal Reserve today showed that its remains committed to restoring economic growth and averting a deflationary outcome. The FOMC kept its target for the fed funds rate unchanged (with the intended range at 0% to 0.25% it cannot really go any lower), but dramatically expanded the scope of the asset purchase programs it has undertaken in an effort to bring down consumer-related borrowing costs.
These additional purchases ($750 billion in mortgage-backed securities, $100 billion in agency debt, and $300 billion of long-dated Treasuries) will add another $1 trillion to the Fed's balance sheet. While the Fed will ultimately have to disentangle itself from this balance sheet expansion if it is to prevent runaway inflation once the economy recovers, the near-term focus is very clearly on re-flating the system and forestalling deflation. This actions today are expected to help support the consumer sector, and could also help banks rebuild their balance sheets.
The stock market rally in the wake of the Fed's announcement comes on top of the substantial equity gains witnessed over the past week. On a closing basis, the S&P 500 has rallied 15% since its March 9 low. In the last six trading sessions, we have witnessed 10-to-1 upside over downside volume surges on three occasions, with the strength in the broad market offsetting to some degree the short-term overbought conditions that have emerged.
The rally has now carried the S&P 500 towards resistance at its 50-day average (now near 800), a level that has proven insurmountable in its last two attempts to break through. Additional resistance is near 870. The full character of the rally (and its ability to persist) will not be known until it is tested with selling. If the March lows represented a good intermediate term bottom, an selling that emerges should be limited in degree and duration, and should come on diminished volume.
Bottom Line: Impressive strength on the broad market is encouraging, but test has yet to come. Fed's reflationary efforts are a near-term positive for the economy, but will eventually have to be paid back.
Evan R. Guido
Private Wealth Management
One Sarasota Tower, Suite 806
Two North Tamiami Trail
Sarasota, FL 34236-4702
941-906-2829 Direct Line
888 366-6603 Toll Free
941 366-6193 Fax
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