Waitin’ on Friday

We haven’t blogged for the past few days because, frankly, there hasn’t been much fresh information to share.  Basically, macro factors continued to dominate the markets and volatility remained above normal.  And, the usual suspects were to blame:

  • European Sovereign Debt
  • European Banks
  • Evidence of a slowing global economy
  • Dysfunctional (and now absent) US Government

Today’s action was a little different, however.  The market flipped around like a fish out of water intraday, but closed a mere 37 points from its opening.  This may be the pattern to expect this week.  Until Friday.

Friday is significant for three reasons that come to mind, and the markets may well tread water until the news begins to flow:

  1. While we’re asleep on Thursday night, the European markets will open with the short-selling ban on banks having expired.  It should be an early indication of the state of the banks when the market can vote freely.
  2. Early on Friday, the GDP revision will be released.  As the last few revisions have been downward (stoking fears of a possible double-dip recession), this release will likely carry more weight than usual.
  3. The much-anticipated Jackson Hole conference will conclude and Fed Chairman Bernanke will make his comments.  For my money, this is the trickiest and most significant event of the day.  For the past few weeks pundits have done their best to guess what the Chairman will do.  Per Bloomberg, 10-year Treasury Bonds are now pricing in a third round of Quantitative Easing (QE3) in the amount of $500 – $600 billion.  But here is where it gets tricky…  If QE3 is either overtly or backhandedly announced, it would seem natural for the markets to levitate; if the reaction is anything at all like that to QE2.  But, such an announcement may very well be construed as an indication that our economy is far worse of than originally thought.  Further, it is widely believed (and stock prices would concur) that QE2 was a failure.  Will a redux of a failed policy be greeted by rising stock prices?  Now, let’s look at the other possible outcome.  The Fed decides its 2013 zero interest rate policy is adequate for now and announces no new QE.  If Bloomberg is correct, there are 600 billion reasons for disappointment.  Yet, it could be an indication that the Fed believes we are closer to the end of the tunnel than most would think.  Tricky stuff, this tinkering around with monetary policy.  Maybe we’ll see a compromise…  a smallish QE3 that gives a little bit of something to everyone.

Me…  I have no idea how Jackson Hole will turn out.  And in a way, I’m not really sure that it matters.  While I’d welcome a solution that would reverse some of this month’s stock market declines, I hesitate to embrace it if it creates a bigger problem in 2012.  It’s our job to manage around the micro world of news flow while at the same time keeping our eyes squarely on our overall objective.  And this Friday, like so many other “major” news days, will provide us with more data, more volatility, and the opportunity to assess just exactly how healthy is our economy.

I’d be interested to hear what you think the Fed will do this Friday.  Feel free to leave your thoughts in the comments section.