Saturday, April 7, 2012

Stocks fall as Fed backs away from further stimulus

The fragility of the current stock market rally was revealed last week after the Fed minutes showed a reluctance by Bernanke & Co. to engage in any further quantitative easing. Most global markets prompted sold off on the news that the punch bowl of free Fed money may not around indefinitely and that investors might actually have to consider economic fundamentals for a change. US stocks fell more than 1% as the Dow closed at 13,060 while the S&P 500 finished at 1398. Indian stocks fared somewhat better edging higher in a shortened trading week. The Sensex gained less than 100 points finishing at 17,486 and the Nifty ended the week at 5322. This mostly negative week was in keeping with my expectations for the approaching Mars-Neptune opposition. I thought we might get some upside on the Sun-Jupiter aspect although that manifested mostly on Monday. Interestingly, Friday's poor jobs report in the US saw futures tumble further although markets were closed for a holiday. Mars does seem to be having its predictably negative influence these days.

Bernanke's unwillingness to goose the market higher with QE3 was an indication of that the economic recovery is underway and that he cannot simply keep pumping money into the system without regard for its inflationary consequences. Gasoline is already pushing towards $5 a gallon in some states. This renewed awareness of the dangers of excessive expansion fits nicely with our hypothesis of the post-Jupiter alignment. Once Jupiter began to separate from its tight angles with Mars and Pluto in mid-March, I thought there would be a gradual reduction of optimism. This has largely played out although the process has been somewhat more protracted than I thought. Many stock indices are only now below their recent peaks, although there is greater awareness of the downside risks from inflation and lower growth than there was previously.

The events this week reveal just how dependent the market is on the largesse of the Federal Reserve. The market has rallied off its October lows largely as a result of Bernanke's Operation Twist in September and then the swap of Euros for Dollars that was orchestrated with the ECB in December. Before that, of course, the entire recovery rally since the low of March 2009 was prompted by Bernanke's QE1 aned QE2 programs. Without these central bank interventions, the stock market would likely be significantly lower than it is today. Investors suddenly woke up to the realization that if QE3 is not coming soon, then suddenly stocks are a whole lot riskier. This week's decline showed how critical QE3 is to support the stock market. In a very real sense, the Fed is in the business of propping up the stock market since Bernanke believes it is a major creator and transmitter of wealth in the US. And since it is also a gauge of economic confidence, it should be supported as much as possible in order to foster an environment where a recovery can take root. At the same time, he can't inject too much liquidity through an over-zealous commitment QE3 because that will create damaging inflation. In Obama's re-election year, $5 a gallon gas could become a major political problem. Bernanke likely wants Obama re-elected because the President is sympathetic to Bernanke's Keynesian economic approach. Probable GOP challenger Mitt Romney, by contrast, was more critical of the various government and Fed bailouts since the recession. Obama also receives a lot of campaign contributions from Wall Street so there may be a willingness by Bernanke to keep Obama at the helm for another term. At the same time, Bernanke has to be careful not to back off too far from further stimulus or else the market may suddenly collapse. A stock market rout and renewed recession fears would similarly damage Obama's re-election chances. So Bernanke needs to finesse his way through the minefield of inflation on one hand and recession on the other. This summer's Uranus-Pluto square aspect would suggest that there is a greater likelihood of something going wrong and that the Fed may fall victim to economic forces larger than it can control. The Gotterdammerung scenario would be that foreign investors refuse to buy US treasuries and demand a higher risk premium due to excessive government debt levels. A spike in yields is the last thing Bernanke needs since it would undermine his attempts to restore the US economy. Rising US interest rates would likely hasten the dreaded double dip recession.

This week we could see more fallout from the impending Mars-Neptune opposition. Mars ends its retrograde cycle on Saturday the 14th so it will remain quite strong here in the coming days. However, a possible ray of sunshine comes courtesy of Venus early in the week as it conjoins Ketu and enters an alignment with the Moon and Uranus. Ketu is a bit of a wild card here although its chameleon-like character may push it towards assuming a more positive influence due to the proximity of Venus. While Monday does not seem promising given the probable negative reaction to the weak US jobs report on Friday, there is still the real potential for gains early in the week.