We humans are generally in the habit of marking off the annual calendar by milestone events that help give some structure to the otherwise random passage of time. At this time of year back-to-school vibes are in the air. But before we get to Labor Day there is another Big Important Date fast approaching. That’s “Ben Week”, and it’s this week, when Fed chairman Bernanke heads out west to give a speech at a central bank conference organized by the Kansas City Fed. Against a backdrop of soaring peaks and skies of deep azure Ben Bernanke will say something about the present state of things – we don’t know what that something will be, but it will likely move markets in one fashion or another, perhaps decisively, perhaps locking in a sustainable directional trend that so far has been largely absent in 2011, or then again perhaps not. The actual “event” of Ben Week will last for maybe 30 minutes or so, this Friday, August 26. Between now and then, in marketland it’s all Ben Week prognostications and divinations. Quid facies o Bernanke magne?
It was just a year ago that the Fed chair used the same picturesque opportunity to announce the launch of QE2. Right on cue risk asset markets embarked on a fall rally that powered through the tricks or treats of October and the cheery festoonery of Christmastime portfolio window dressing right into 2011. And then…something right out of the movie “Groundhog Day” as a burgeoning spring rally ran into the headwinds of a European debt crisis and weaker-than-expected macroeconomic indicators. Markets turned south, volatility spiked and now, one year to the day later, all eyes are again on the Fed. Listen carefully and you may hear that same refrain of “I Got You Babe” that dragged Bill Murray out of his sleep over and over again on that never-ending February morning.
But that may be where the déjà vu ends. Markets are already trading up strongly ahead of Friday, but given the extent to which they have been beaten down over the past several weeks it is not altogether surprising to see a swell of bargain-hunting taking a position ahead of the announcement. The thinking is fairly sound: if Bernanke does take bold action in the form of some kind of QE3 that expands the Fed’s balance sheet again or something of equal import, then shares are likely to rise dramatically from today’s low levels. On the other hand, if he merely makes mildly encouraging utterances about how the “Fed stands ready” then one may see a bit of selling but the downside would be limited. Along this line of thinking it would be not unusual to see solid buying continue over the remainder of the week.
The larger question is whether even a bold QE3 program would produce the kind of sustained market effect it did last year. After all, one could argue that QE2 did little other than to prop up asset prices for awhile. Unemployment hasn’t budged, consumer confidence remains low, the housing market is stuck and manufacturing indicators have turned down. Corporate profits are strong but the effects of that strength have yet to be felt much in the US economy. Sure, a Fed asset buying program could juice up prices for a few days, but eventually there has to be some connection between asset price growth and real economics. Right? Anyone? Bueller?