by Shawn Narancich, CFA
Vice President of Research
Cranking Up the Printing Presses
Following last week’s gains inspired by central banking developments in Europe, Bernanke and Co. delivered another dose of monetary policy relief that sent stocks to new multi-year highs. Investors anticipated new easy-money policies to come out of the Fed’s meeting this week, but the open-ended nature of what is being dubbed QE3 left those without adequate equity exposure longing for more. Purchasing $40 billion of mortgage-backed securities each month and signaling that short-term rates will remain near zero until at least 2015 ensure that the Fed’s balance sheet will continue to grow. Capital markets reacted predictably, bidding up the price of commodities such as gold, oil, copper, as well as the stocks of economically sensitive sectors like energy, materials, and financials. The $64,000 question is whether or not more quantitative easing will perk up a moribund job market plagued by fiscal policy uncertainty. Detractors worry about the inflation risks, but with the velocity of money having slowed so much, is it any wonder that U.S. inflation stands at 1.7 percent?
Don’t Worry, Be Happy!
Meanwhile, stocks and sovereign bonds in Europe continued to benefit from policy support there. The German Constitutional Court put its stamp of approval on the new European Stability Mechanism (ESM) bailout fund, setting the stage for the European Central Bank to purchase short-term debt of troubled countries once these troubled countries formally apply for aid. Only time will tell if Italy and Spain ultimately have to do so; but for now, the brush fires in Europe have subsided. The risk-on trade has left Treasuries out of the buying party with benchmark 10-year yields backing up to 1.87 percent.
A Fresh Apple to Pick
Apple introduced a new smartphone this week for the first time since the death of founder Steve Jobs. A larger screen and new fourth generation LTE technology should make the iPhone 5 better suited to video downloading at speeds that may incent more phone users to increase their data usage. At least that’s what prime carriers AT&T and Verizon Wireless hope will happen. The phone appears to have sold out on initial production runs, so the subsidy hit to profits will wash up on the carriers’ income statements this quarter and next. New tiered data plans required for the upgrade should provide the opportunity for upsell, but the degree to which customers ratchet up to more costly plans will ultimately determine whether or not the Big Bells make money off Apple’s latest and greatest. One thing’s for sure, Apple will.
Our Takeaway from the Week
- The promise of new money creation is driving stock prices higher despite slow economic growth