THE EASYGOING FED: SWEET TALKING AND STOCKS (c) Leo Haviland June 20, 2013

The S+P 500 trend and level are important variables in Federal Reserve Board decision-making. Recent statements by the Fed hint that for the near term this revered marketplace monitor probably is relatively (increasingly) unwilling to incite rallies beyond the May 2013’s 1687 height. At around the 1475 to 1520 range, the Fed might offer some attention-capturing and enticing aid- even if it is only sweet talk emphasizing its commitment to its beautiful long-lasting easy money regime. The easygoing Fed probably will volunteer notable support to the S+P 500 around 1350, though it nevertheless may await the 1265 to 1315 span before it offers dramatic marketplace help.

However, the Fed nevertheless recently murmurs that it may not remain forever as accommodating. Perhaps it will reduce in the relatively near future the rate at which it now buys UST and mortgage-backed securities. After all, it did quit QE1 and QE2. Moreover, the Fed resumed its pillow talk of its beloved exit strategies lately.

Focus on some of the Federal Reserve Board’s economic rescue measures in recent years in the context of S+P 500 dives.

If the S+P 500 creeps five percent lower, that quite probably will worry the Fed little if at all. However, this economic doorman probably will offer sugarcoated wordplay, and maybe some renewed easing (most likely some incremental money printing), if the S+P 500 falls 10pc. First, note the emergence of talk of easing after the S+P 500 fell from 4/2/12’s 1422 to its 1267 bottom on 6/4/12, a 10.9pc decline. Admittedly the Fed did not uncover QE3 until mid-September 2012, with the S+P price around 1475. The Fed very likely was severely disappointed by the wilting of the S+P 500 from 1475 despite its glorious proclamation of QE3. However, the Fed, after the S+P 500 fell a modest 8.9pc down to 1343 on 11/16/12, not long afterwards opened its easing door more widely with its 12/12/12 policy guidance on inflation and unemployment and a further boost in money printing.

What about a twenty percent S+P 500 fall? Recall the 4/26/10 high around 1220. The Fed ended QE1 in March 2010. This benchmark index reached its bottom on 7/1/10 at 1011, a fall of 17.1 percent; it made a second low at 1040 on 8/27/10. Highlight the gradual appearance on the runway from end August to November 2010 of QE2’s money printing. On 5/2/11, the S+P 500 established a noteworthy interim peak at 1371. QE2 ended in June 2011, alongside this marketplace top. Equity bulls bemoaned the bloody crash in the S+P 500 to 10/4/11’s 1075. As the price fell off the table, and not long before the October low, the Fed ushered in Operation Twist (9/21/11). The rapid deterioration from the May 2011 plateau to the October low was 21.6pc. Since these two falls of around twenty percent apparently helped to prompt Fed action, a twenty percent stumble from any notable pinnacle probably would arouse Fed easing activity. In addition, many marketplace clairvoyants promote the opinion that a twenty percent marketplace plunge defines a bear marketplace. Consequently, the Fed does not want bearish sentiment to accelerate declines in the S+P 500 and thus dampen enthusiasm in the so-called real (wider) economy.

S+P-500-Chart-(6-20-13,-for-Easygoing-Fed-essay)
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The Easygoing Fed- Sweet Talking and Stocks (6-20-13)
S+P 500 Chart (6-20-13)