Stocks will benefit from stimulus. No, scratch that. Stocks will benefit from a lack of stimulus.
So went the logic on Wall Street after the U.S. Federal Reserve shelved any immediate plans for another blast of funds to try to re-ignite the recovery.
For days, stock markets had drawn hope from the belief that the Fed would launch another round of stimulus, similar to the $600-billion (U.S.) round of asset purchases it initiated last year. But last Friday, Fed chairman Ben Bernanke nixed that idea, which wasn't actually surprising given the questionable effectiveness of the last stimulus and the fierce opposition to more spending from politicians and some members of the Fed's own Federal Open Market Committee (FOMC).
What is amazing is the reaction of many money managers, who suddenly flipped from welcoming a round of Fed stimulus to interpreting it as a sign of weakness.
Keith Springer, president of Springer Financial Advisors in Sacramento, Calif., echoed a common sentiment when he told Bloomberg News: "This is good news for investors. It's telling you there's no reason to panic because they have the impression that the economy is getting better."
Don't expect the collective hypnosis to last. Economic reports coming this week are expected to show weakness in third-quarter spending, sliding consumer sentiment, rising joblessness and a contracting manufacturing sector. Furthermore, the minutes from the August FOMC meeting, due on Tuesday, could spotlight growing discord over additional use of monetary stimulus to try to help the economy.
"Given that the meeting ended with the largest division among policy makers (7 to 3) in nearly two decades, it will be noteworthy to see whether other members at least sympathized with the three dissenters who opposed specifying an extended time frame for low rates. In the event, the chairman could face stiffer opposition to more stimulus measures, in particular another large-scale asset purchase program," noted Sal Guatieri, senior economist with BMO Nesbitt Burns Inc.
On Monday, U.S. personal income and spending figures for July are expected to show a small increase of 0.3 and 0.5 per cent respectively, which doesn't look very strong next to the 0.5 per cent increase in consumer prices. The Conference Board's consumer confidence index on Tuesday is expected to have dipped again in August, to 52 from 59.5 in July. And growth in Canada's real GDP in the second quarter is expected to prove flat.
On Thursday, the U.S. Institute for Supply Management releases its August manufacturing index. The ISM index dipped perilously close to 50 in July, a threshold that signals a contracting sector. Economists forecast that the number for August will fall below 50, the first time it's been that low in two years. A figure of 46 or less indicates a recession.
On Friday, the U.S. payroll report is expected to show 85,000 new jobs in August, compared with 117,000 in July. That total would not be enough to budge the official unemployment rate from its stubborn 9.1 per cent mark.
With second-quarter earnings reports drawing to a close, companies listed on the Toronto Stock Exchange are expected to have collectively delivered a robust 59 per cent increase from a year earlier, according to Thomson Reuters. But market watchers are already speculating that those impressive numbers are unlikely to be matched going forward. The same goes for U.S.-listed companies.
Today, the shares of the companies that comprise the S&P 500 are trading at an average 12.7 times reported earnings, which is significantly below the historical average. But if analysts have to reduce their earnings expectations, forward-looking price-to-earnings multiples would fall.