Author: Charles Sizemore
“Far from satisfactory.” Those words could describe so much these days. They could describe either of the gentlemen running for president this November or of both of America’s major political parties. They could describe the performance of the stock market over the past 13 years, or the options available to fixed-income investors.
They could describe the progress Europe’s politicians have made towards resolving the on-going Eurozone crisis or the steps that global banking regulators have taken to ensure that another 2008-caliber meltdown never happens again.
The words above could easily have described any or all of the above. But when Fed Chairman Ben Bernanke spoke them following his speech at the Fed’s annual retreat at Jackson Hole, he was referring to the health of the U.S. economy.
“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions,” Mr. Bernanke announced, adding that “the costs of non-traditional policies…appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
In plain English, Bernanke said that a “QE3” is highly likely unless we get a surprise bout of growth. Quantitative easing has become something of a dirty word this election cycle, but we believe that the Fed Chairman is correct to keep it on the table as an option.
Outside of food prices—which are driven by drought conditions and alternative fuels policy—inflation remains very subdued, so the risks involved with a QE3 would appear to be almost nil. Meanwhile, the nascent recovery in the housing market—on which so much else depends—is still very fragile, and the low long-term interest rates that the quantitative easing programs provide are very necessary in keeping the recovery alive.
Still, the biggest risk to both the U.S. economy and to our capital markets remains a potential Eurozone meltdown. And on this count, we have several important dates on the horizon. This coming week, on September 6, the ECB will be having a meeting in which many are expecting to hear details about Mario Draghi’s long-anticipated bond purchase plan, which will hopefully relieve pressure on Spain and the other periphery countries.
Should Draghi’s comments disappoint, we could be in for some fresh volatility, particularly in European stocks. And once this hurdle is cleared, we have the German Constitutional Court’s decision to look forward to, scheduled for September 12.
The consensus forming here is that the court will uphold, in principle, the constitutionality of German participation in the Eurozone’s bailout funds but that it will also muddy the waters a little with a list of conditions. Whether or not the market reacts favorably will likely depend on how onerous the German demands are.
Overall, we are not expecting any major disruptions this month; we expect the ECB and German court announcements to proceed without any major hiccups, and we remain aggressively positioned in European equities.
But given what is at stake, we intend to watch events closely and make portfolio changes as needed. This is a time to stay nimble.