The Federal Reserve and the Bear Market
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Non Farm payroll day is upon us once more which generally mean an incredibly dull morning followed by a graphic impersonation of a headless chicken this afternoon.
Depending on which recent employment number you focus on the chances are for either a dramatically better or worse number than the forecast drop of 50k but even the response to the number will be difficult to gauge.
If the figure comes in substantially worse then the market may take this an indication that the Fed will be cutting rates even more quickly than in the past few months which may well leave us in the situation of a poor number causing a rally and vice versa.
At the moment the driving force for ‘good’ in the markets has been the Federal Reserves actions whilst at the same time actual economic data has been viewed from a less than favourable outlook. This is a feature of market trends and is demonstrated in bull runs where rose tinted glasses view every economic number as positive in some fashion no matter how bad and in bear markets are seen as the exact opposite.
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The Federal Reserve still seems to be, to some extent, in the pocket of Wall Street as virtually every move is designed to bolster equity prices and to keep the ‘dream’ alive. Bear moves are a feature of stock markets and have been since their inception. However the US almost seems to think that falling valuations are somehow un-patriotic. The current regime is possibly spending tomorrow’s stability in trying to prop up yesterday’s mistakes. Whilst failures in major financial institutions are, of course, not to be borne lightly, the prospect of the opposite where the US Treasury stands solidly behind every institution is not what is normally meant by ‘unfettered’ capitalism.
We run the risk of either increasingly hazardous lending on the basis of ‘better hung for a sheep than a lamb’ and it doesn’t matter anyway ‘cos the Fed will bail us out anyway. Or, if the Regulators extract a tighter oversight regime for their ‘promise to pay’, we may end up with an almost state style lending scenario where initiative and risk are smothered.
All in all we are not out of the woods yet and if dramatically lowering rates and pouring money into the economy was all it needed to boost growth and dig everyone out of their holes then why aren’t we all doing it. The US actions are a desperate measure and like all such moves have now risked an even greater disaster in an attempt to find a quick fix to the current one.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'The Federal Reserve and the Bear Market' edited by DB, updated 04-Apr-08
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