U.S. stocks reversed an early-session sell-off after Bernanke signaled the Fed isn’t going anywhere and additional consideration of further stimulus will occur at the September meeting.  In the early trade, another lower revision to GDP held traders back and as they read the Bernanke speech it took time to get to the part where he states they have extended the September meeting to two days – very much increasing the chances of more accommodation.

Tech, consumer discretionary and basic materials led the rally.  Utility shares were the lone loser as the index that tracks the sector closed lower; telecoms and consumer staples also underperformed by did manage to close up.

The Fed chairman’s much anticipated speech on Friday was pretty much anticlimactic as he not only refrained from announcing more stimulus (via QE or some other nonconventional policy action) but didn’t even lay out the tools that they still have at their disposal – although he’s laid these possible actions out so many times now one can understand why he simply reiterated they have these tools that can be used.

What he did give the market was the continued expectations that the Fed will be there to goose things if the economic course deteriorates, which he explicitly stated they’ll discuss at the September 20-21 meeting – a meeting that they have extended to two days, which is an extraordinary move as these things are usually set in stone.  This was a big signal as it says they’re going to think about action in a more thorough manner than initially was the case.  Further, since it is now evident to all that the economic situation has deteriorated substantially, this was read as a sign that he will further support the stock market if need be (unless by saying they’ll wait for things to play out he means the economy has regressed into actually contraction).

My expectation has been more QE/a shift to more longer-term securities (anticipation of which has driven interest rates to these ultra-low levels) will come by the end of the year or early 2012, but maybe September is the time.  I provide additional comments below.

Market Activity for August 26, 2011

Sector Activity for August 26, 2011

More on the Speech

The topic of the speech was the near and long-term prospects for our economy so he did spend most of his time talking strictly about the economy -- where we’ve come from over the past two years and that the economy is healing from the harsh period of recession (but in such a generic manner there are really no specifics to report).  He basically compared current conditions to 2008 (not a very tough comparison to say the least), but never once acknowledged that GDP has quickly deteriorated to 1.5% y/o/y even with monetary policy unprecedentedly aggressive.

He touched on a view out in the marketplace that believes we are trapped in a multi-year period of economic stagnation, and that he has a more optimistic view of things.  One thing that we must acknowledge, made evident by just how wrong (on the rosy side) Fed economic growth forecasts have been, is that the Fed Chairman is more interested in cheerleading the economy, for fear a more dire assessment adversely hits confidence, so his economic projections just can’t be taken seriously.

(It’s my believe that the U.S. economy will emerge from this period of stagnation much like we did the troubles of the 1970s (different situation back then but very dire and certainly sapped the American spirit.  We will move to a policy framework that unlocks our potential once again and delivers a decade or two of very strong growth.  Where I differ from Bernanke (at least his public view) is that we’re still 2-3 years away from this revival and the interim period is likely to get nasty again.

What I find most interesting when The Bernank speaks to this topic is that he never faults his own policy for very much helping to deliver the credit bubble (dangerous levels of consumer, housing, institutional leverage) that has brought us to this period of economic distress.  I find it quite irresponsible not to admit that their policy of negative real fed funds for three full years back in 2002-2005 encouraged a period of excess debt.

First Revision to Q2 GDP

The Commerce Department reported that second-quarter growth was revised down to 1.0% at a real annualized rate (slightly worse than the 1.1% expected) from the 1.3% that was initially reported.  This follows the 0.4% rate in the first quarter – a number that was massively revised down from the initial 1.9% print and is what got the stock market started on its August slide.

I’ve got to say, I was prepared for this latest print to go sub-1.0%, which would have been only the second time in the postwar period such weak growth had occurred (outside of recession of course) – the only time on record this occurred was 1979 (back-to-back quarters of sub-1.0% GDP); the recession of 1980 soon followed.

So what led the revision lower were pretty substantial downward revisions to inventories (something this two-year recovery has depended way too much on) and exports.

The downward revision to inventories isn’t so bad as it states that there is room to produce if companies gain some confidence, but that would take more sales growth.  The bad news is just that, there is a confidence problem.  The lower revision to exports is more disturbing as it shows the deterioration within the global economy.

On the plus side, personal consumption was revised up from a non-existent 0.1% (that’s at a real annual rate) to 0.4%.  Not much of a plus I guess as the average for this largest component of GDP is 3.3% but this is a very weak environment so you take what you can get.

The best news was that business spending was much better-than-initially estimated as nonresidential fixed investment rose 9.9% vs. the 6.3% initially estimated and the equipment & software segment came in at 7.9% vs. the 5.7% -- which was all due to higher software spending as equipment purchases were unchanged from the previous estimate.

The fact that inventories were revised down means that the real final sales aspect of GDP (a measure of demand) was revised up to 1.2% from 1.1%; however, this figure, as we’ve talked about for two years now, should be printing numbers of at least 4% and really closer to 5% based on the severity of the recession.

University of Michigan Confidence

The U of M’s gauge of consumer confidence for August was revised up by nearly a point to print 55.7 – the survey of current conditions was revised down (extending the seven-month plunge), while the outlook survey (measures consumers’ views of things a year out and accounts for 60% of the headline index) was revised up.

The preliminary look had the headline reading at 54.9, which would have been the worst result since the measure’s all-time low of 51.7 in May 1980.  Now as it was revised up to 55.7, the level is just a touch above the low 55.3 hit in November 2008.

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Have a great day! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900