Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Fed-Induced Stock Rally Short-Lived
Stocks rallied sharply following the “dovish” FOMC minutes on Wednesday, then gained momentum to the downside when it became apparent that global risks (in Europe and China) might be too big for the Fed – let alone any other central bank – to handle. Triggering that revelation may have been Germany’s 5.7% drop in factory orders or its opposition to the ECB’s plans for QE voiced by finance officials Wiedmann and Schäuble. But let’s not forget, markets have been in a state of vulnerability for some time now. In such cases, the want of a nail is all that’s needed to set things in motion. In any event, it was a slightly scary week for stocks. That’s especially true given that investors are starting to see that the Fed may be of little help in stabilizing a deleveraging in stocks.
Away from equities, Treasuries gained nicely after the minutes were released, but then flattened out for the remainder of the week, even as stocks continued to trek southward. The precious metals caught a solid bid and rose above interim technical levels (1,216 for gold, 17.25 for silver). That enthusiasm was doused by week’s end as the dollar regained its composure and rallied just shy of previous resistance at 86.0 on its index.
Even if world financial issues are too big for the Fed to manage, that certainly doesn’t suggest they won’t try, perhaps with force. This week was pivotal in that regard, as the minutes subtly revealed that a policy-determining psychological shift may be underway – rendering token the Fed’s last taper of $15.0 billion in October.
However, with uncertainty building in regard to the effectiveness of QE, stocks may remain under pressure, bouncing off of technical support levels until a 10% correction whistle is blown – or some such thing. In the meantime, it’s a welcome development to see the metals stabilize as they did this week. Further upside is probable, yet dependent on a revelation – Americans must wake up and see that, when it comes to economic and financial issues, we’re in the soup with the rest of the world. This week’s events may have been a ray of dawn in that regard.
VP Investment Management