Week Ahead: Fed Proclaims “Let the Good Times Roll!”

For the first time in five years, the Fed shifted policy and guess what? The world kept spinning! In fact, stocks soared on the news that the central bank would reduce its monthly bond purchases by $10 billion to $75 billion and keep short-term interest rates at rock-bottom levels. I guessed last week, that “Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change to policy, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.” What I did not anticipate was a central bank Christmas bonus: not only would the pull-back in bond buying occur slowly, but the Fed plans to keep short-term interest rates at near zero, even after the unemployment rate dropped below 6.5 percent, which likely means that rates will stay low at least for another year.

Put a different way, it’s like your parents announcing that they will reduce the proof of the punch bowl booze from 85 to 75 AND the party will continue right through next year! Sure, the festivities may not be quite as much fun in six months from, when the proof drops to 45, but for now, let the good times roll (h/t The Cars)!

MARKETS: Finally, a REAL milestone. The Dow hit a new inflation-adjusted high on Friday. The blue chip index had to reach 16,186.39 to have the same buying power (based on CPI) it had when it was worth 11,722.98 on January 14, 2000, according to the WSJ.

• DJIA: 16,221 up 3% on week, up 23.8% on year
• S&P 500: 1818, up 2.4% on week, up 27.5% on year (best week since July, on track for best year since 1997)
• NASDAQ: 4104, up 2.6% on week, up 36% on year (18% below 3/00 all-time high of 5,048)
• 10-Year Treasury yield: 2.89% (from 2.87% a week ago)
• Jan Crude Oil: $99.32, up 2.5% on week
• Feb Gold: $1203.70, down 2.5% on week, down 28% on year (on track for first annual decline in 13 years)
• AAA Nat'l average price for gallon of regular Gas: $3.24

THE WEEK AHEAD: Take a load off…it should be a quiet, holiday-shortened week!

Mon 12/23:

8:30 Personal Income and Spending

8:30 Chicago Fed National Activity

9:55 Consumer Sentiment

Tues 12/24:

8:30 Durable Goods Orders

9:00 FHFA Home Price Index

10:00 New Home Sales

1:00 Markets close early Christmas Eve

Weds 12/25: GLOBAL MARKETS CLOSED FOR CHRISTMAS

Thurs 12/26:

8:30 Weekly Jobless Claims

Fri 12/27:

Sat 12/28:

Long-term unemployment benefits expire for 1.3 million Americans

Week Ahead: Federal Reserve Nerve

Will they have the nerve to do it or won’t they? For the last time in 2013, investors and economists are wondering whether or not the Federal Reserve will finally pull the trigger and announce a reduction in its monthly bond purchases (aka “Quantitative Easing” or “QE3”). According to my non-scientific poll, odds are running at about 50-50. Those who say that the Fed will act, point to the September FOMC meeting rationale that Ben Bernanke laid out for why the central bankers maintained the status quo. At the time, he cited three concerns that put taper talk on hold: (1) the labor market was still weak (2) the recent rise in interest rates could slow down the economy and (3) lawmakers in DC could throw everything for a loop.

In the subsequent three months, there has been positive movement on all fronts.

1. Employment: Job growth has accelerated, boosting the average monthly gain to over 200,000 for the past three months. Additionally, the unemployment rate has dropped to 7 percent. Way back in June, Bernanke said that an unemployment rate of 7 percent could be a trigger for pulling back on the Fed’s stimulus.
2. Economic slowdown: Despite higher interest rates, the economy is picking up steam. Q3 GDP was revised higher to an annualized pace of 3.6 percent; November retail sales were stronger than expected; and the increase in home and stock prices are combining to increase the so-called “wealth effect,” which should encourage more consumer spending.
3. DC Drama Queens: It may have been a small budget deal, but it was a deal. Congress agreed to increase spending by $63 billion over two years, with the caveat that there will be more than $22 billion in deficit reduction over the next decade. While lawmakers reserve the right to screw things up over the long-term, the short-term pressure is off.

Despite the progress, doubters note that the Fed is still worried that the labor market is not sufficiently healed and that the drop in rate is occurring not just because employment is rising, but also because people are leaving the labor force. Additionally, there is lingering concern that the low level of inflation is causing anxiety among some central bankers. Then there’s the theory that the Fed may wait until Janet Yellen takes over as Chairman in January, before retreating from five consecutive years of aggressive action. (The Senate is expected to vote on Yellen’s nomination this week.)

Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.

Aside from the Fed meeting, there will also be news from the real estate market. Analysts say that the housing recovery is entering a new phase. The recent rapid rise in prices, which was driven by strong investment buying and tight supply conditions, will soon start to moderate as higher mortgage interest rates and increased inventory slow down progress. The recovery may take a breather, but it is likely to remain intact.

MARKETS: Boo-hoo…two consecutive weeks of losses is nothing compared to the massive year-to-date gains of 20 to 30 percent for stocks. As a reminder, the current bull market began in March 2009 and the S&P 500 is up 162 percent since then.

• DJIA: 15,755 down 1.7% on week, up 20.2% on year
• S&P 500: 1775, down 1.7% on week, up 24.5% on year
• NASDAQ: 4001, down 1.5% on week, up 32.5% on year
• 10-Year Treasury yield: 2.87% (from 2.88% a week ago)
• Nov Crude Oil: $96.60, down 1.1% on week
• Feb Gold: $1234.60, up 0.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.24

THE WEEK AHEAD:

Mon 12/16:

8:30 Q3 Productivity

8:30 Empire State Manufacturing Index

9:15 Industrial Production

Tues 12/17:

FOMC begins

8:30 CPI

10:00 Housing Market Index

Weds 12/18:

8:30 Housing Starts

2:00 FOMC Policy Announcement & economic projections

2:30 Bernanke Press Conference

Thurs 12/19:

8:30 Weekly Jobless Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed

Fri 12/20:

8:30 Q3 GDP – final reading (2^nd estimate=3.6%)

8:30 Corporate Profits

Week Ahead: Strong Jobs Report leaves Fed in a Pickle

The stronger than expected jobs report leaves the Fed in a pickle. The economy added 203,000 jobs in November and the unemployment rate decreased to a five-year low of 7 percent from 7.3 percent. You may recall that soon-to-be-departed Fed Chairman Ben Bernanke said that when the data indicated that the economy in general – and the labor specifically – was showing progress, the Fed would take its pedal off the gas and reduce its monthly bond purchases, known as Quantitative Easing or “QE3”. The Fed launched QE3 in September 2012. Since then, the unemployment rate has dropped from 8.1 percent to 7 percent and the economy has added over 2.8 million jobs, or an average of nearly 190,000 per month. That sounds pretty good, except when you consider that it’s only about 10,000 per month more than before the introduction of the program.

Still, there is evidence that the pace of job creation is picking up. Over the past four months, the average monthly gain has been over 200,000 after a late spring/summer slow down. Additionally, the November jobs report showed broad-based gains in a variety of sectors, with manufacturing, construction, education, health and retail all demonstrating improvement. Independent research firm Capital Economics believes that the Fed has “all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month.”

Not so fast, says Jon Hilsenrath in the Wall Street Journal. He notes that the drop in rate was driven by a reversal of some of the shutdown-related increase the month before. “A meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell…because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.”

Indeed, the labor force participation rate (the number of people employed or actively seeking a job) remains at near 36-year lows. Oh, and there are still 10.9 million Americans are out of work, of which more than 4 million have been unemployed for more than six months; total payroll employment (136.8 million) is still short of the January 2008 peak of 138.1 million workers; and while an unemployment rate of 7 percent seems good compared to the recession high of 10 percent, it seems miles away from the 4.7 percent rate seen six years ago in November 2007, the month before the recession officially started.

In other words, if the Fed wants to punt on unwinding QE3 at the December 17-18 policy meeting, it could easily find a way to do so. With unemployment still a good distance above the Fed’s 6.5 percent threshold, it is unlikely to raise short-term interest rates until next year.

Volcker Rule: On Tuesday, regulators are expected to approve the "Volcker Rule," named after former Fed Chairman Paul Volcker. The rule is one of the most controversial parts of the 2010 Dodd-Frank financial overhaul because it seeks to stop banks with federally insured deposits from making trades and putting their own capital at risk, in pursuit of speculative trading profits. But as noted in the Financial Times, “after three years of lobbying, wrangling and debating over the rule, there is the potential for a depressingly messy execution…The desire for a rule specific enough to turn grey into black and white risks turning Volcker into a 1,000-page horror.”

MARKETS: Good news was finally good news on Friday, which saved stock investors from steeper losses. Still, it was the first losing weekly decline in nine weeks for the Dow and S&P 500. According to John Linehan, Head of U.S. Equity at T. Rowe Price, this bull market has lasted for 57 months so far, which is the average length of bull markets since 1930.

• DJIA: 16,020, down 0.4% on week, up 22.2% on year
• S&P 500: 1805, down 0.04% on week, up 26.5% on year
• NASDAQ: 4,062, up 0.06% on week, up 34.5% on year
• 10-Year Treasury yield: 2.88% (from 2.75% a week ago)
• Jan Crude Oil: $97.65, up 5.3% on week
• Feb Gold: $1229, down 1.6% on week (5-month low)
• AAA Nat'l average price for gallon of regular Gas: $3.26

THE WEEK AHEAD:

Mon 12/9:

Tues 12/10:

7:30 NFIB Small Bus Confidence

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Wholesale Trade

Volcker Rule vote

Weds 12/11:

Thurs 12/12:

8:30 Jobless Claims

8:30 Nov Retail Sales

10:00 Business Inventories

Fri 12/13

8:30 PPI

Dow and S&P Reach Milestones: Bubble Fears Arise

The Dow pierced the 16,000 level for the first time ever - and perhaps more impressively, it made the jump from 15,000 to 16,000 in just six months. The S&P 500 poked above 1800 in less than 4 months after taking out 1700. To put the rapid rise into context, after first reaching 1500 in March 2000, it took the broad index 13 years to reclaim that level. For tech fans, the NASADAQ recently touched 4,000, a level not seen since September of 2000. Although the economy has improved and corporate profits continue to surpass expectations, the Federal Reserve is responsible for the lion’s share of the stock market’s move higher over the past year. Without low short-term interest rates (0 to 0.25 percent since December 2008) and $85 billion worth of monthly bond buying, it’s hard to build a case where stocks would be at these levels.

But we are where we are. The S&P 500 is up 26 percent this year and has risen by 166 percent since the March 2009 lows, which means that bubble fears are arising anew. The bears point to troubling signs, including: ordinary investors are finally buying back in -- money is pouring into stock mutual funds and exchange-traded funds at the highest rate in four years; investor sentient has become almost uniformly optimistic; borrowing to purchase stocks is at record levels; and the main gauge of investor fear is low. Some warn that taken together, investors are becoming complacent, setting everyone up for a correction, which is a pull-back of more than 10 percent.

But just because a correction could be coming, does not mean you should bail out. If you are a long-term investor with a 15 or 20-year time horizon, there is no reason to alter your game plan – use the new highs to rebalance and keep investing in a diversified portfolio. But if you are the kind of person who simply cannot handle the ups and downs of the stock market, remember that just because stocks are higher, does not make them any safer. Please use caution before jumping back in!

Even if new milestones don’t really mean too much, I am happy to use them as an opportunity to remind you to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here's what smart money has known forever--the quicker you learn these rules, the better:

Don’t let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.

Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)

Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.

Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.

For those who want to protect their portfolios against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration. This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds. Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes. Floating rate loan funds invest in non-investment-grade bank loans whose coupons “float” based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand. Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Week ahead: Will Yellen Pump or Pop Bubbles?

Is Janet Yellen a bubble pumper or bubble popper? That’s what some lawmakers wanted to know when the presumptive heir to the Fed Chairmanship appeared before the Senate Finance Committee last week. Considering that the S&P 500 is up 166 percent from the March 2009 lows, some are worried that the Fed’s aggressive monetary policies are far more responsible for boosting stocks than the recovering economy and improving corporate profits. To her credit, instead of pulling out the Greenspan/Bernanke mantra of “we can’t identify bubbles, but we will clean up after they burst,” Yellen said that nobody, including any of the fed officials, wants to go through another 2008 again. While she does not currently see evidence of a bubble-like environment “that threatens financial stability…I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming.”

Senator Bob Corker (R-TN), who is no fan of the Fed, Bernanke or the current central bank policies, asked Yellen whether she would have the guts to prick a bubble. Yellen said that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Corker interrupted her and asked the money question: With a bull market raging, would you have the mettle to use these unpopular measures? “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”

Bubble popper it is!

The rest of the Senate appearance was pretty much what you would expect: a defense of the monetary policy that Yellen helped create. She said that the Fed’s bond buying program had “made a meaningful contribution to economic growth and improving the outlook” and said that when there has been progress in labor market, the Fed would reduce its purchases.

As the confirmation process continues, investor attention will shift to the current chair, Ben Bernanke this week. He will deliver a major speech on Tuesday night, which along with the release of the minutes from the last policy meeting could contain clues about future central bank actions. Specifically, everyone wants to know whether there are specific metrics that would lead to a change in policy.

While the central bank maintains that the current game plan is necessary, there are risks to the strategy. At every meeting, Fed officials weigh the benefits of quantitative easing (QE) versus the costs, which include managing a ballooning balance sheet and the threat of higher inflation in the future. The Fed’s purchase of mortgage-backed and treasury securities, has so far left the central bank holding $3.86 trillion in assets. Defenders of the policy say that the Fed can simply sell those assets in the future, but doing so could mean absorbing significant losses, since the Fed would likely be selling as bond prices were falling. In theory, the Fed has other policy options, but they have never been tested, which makes economists a bit nervous about their efficacy.

One group not showing signs of nerves is investors. All of the sudden, Mom and Pop are getting back in the game. According to Strategic Insight, inflows into stock mutual funds and Exchange-traded funds are on track for a total of $450 billion for 2013, which would be more than the last four years’ inflows. Of course, the idea that regular people are jumping back in after 56-month, 166 percent bull-run may mean that the market could be setting everyone up for a correction (a pull-back of more than 10 percent). Then again, the technology bull market lasted from October 11, 1990 until March 24 2000, resulting in a 417 percent gain, so maybe the bull has more upside.

MARKETS: For the sixth consecutive week, the Dow and S&P 500 closed higher and at new all-time nominal high levels.

• DJIA: 15,961, up 1.3% on week, up 21.8% on year
• S&P 500: 1798, up 1.6% on week, up 26% on year
• NASDAQ: 3986, up 1.7% on week, up 32% on year (briefly touched 4,000 for the first time since Sep 2000)
• 10-Year Treasury yield: 2.71% (from 2.75% a week ago)
• Dec Crude Oil: $93.84, down 0.8% on week (6^th consecutive losing week)
• Dec Gold: $1287.40, up 0.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.21

THE WEEK AHEAD:

Mon 11/18:

10:00 NAHB Builder Index

Tues 11/19:

7:00pm Bernanke speech to NABE

Weds 11/20:

8:30 Retail Sales

8:30 CPI

10:00 Existing Home Sales

10:00 Business Inventories

2:00 FOMC Minutes

Thurs 11/21:

8:30 Jobless claims

8:30 PPI

10:00 Philadelphia Fed Survey

Fri 11/22:

10:00 Job Openings and Labor Turnover (JOLTS)

Dow, S&P Records: What to do now

For the 26th time this year, the Dow finished at an all-time nominal closing record and the broader S&P 500 saw it’s 20th record close of the year. This year, stocks are up about 18 percent – an amazing performance, but (buzz-kill alert) we there is still quite a ways to go to reclaim new highs, when adjusted for inflation: the Dow has to rise above to 15,730 and the S&P 500 has an even steeper climb to over 2,000. Don’t even start to calculate the NASDAQ, which needs to add another 1425 points to get back to the nominal closing high. We all know that Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market’s move higher. Without low short-term interest rates (0 to 0.25 percent since December 2008) and $85 billion worth of monthly bond buying, it’s hard to build a case where stocks would be at these levels. That’s why all eyes have been on Bernanke over the past 8 weeks, as he has tried to explain under what circumstances the central bank would taper its bond purchases.

There will be another chance for a taper-tantrum this week, when Bernanke provides his semi-annual testimony to the House and Senate. That means you have a couple of days to force yourself to rebalance your investment accounts.

Remember that just because stock are up, does not make them safe. If you are the kind of person who simply cannot handle the ups and downs of the stock market, then your inclination is probably to avoid stocks at all costs. But what if you kept your stock allocation to a level where they gyrations didn’t cause you to lose sleep? Maybe a stock allocation of 10 to 20 percent of your portfolio would allow you partially participate over time, but not get your hat handed to you if/when the bottom falls out.

Even if new records don’t really mean too much, I am happy to use them as an opportunity to remind you to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here's what smart money has known forever--the quicker you learn these rules, the better:

Don’t let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.

Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)

Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.

Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.

For those who want to protect their portfolios against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration. This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds. Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes. Floating rate loan funds invest in non-investment-grade bank loans whose coupons “float” based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand. Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Week ahead: Earnings, Boomerang Stocks, Bernanke to Capitol Hill

Let's start at the very beginningA very good place to start When you read you begin with A-B-C When you sing you begin with do-re-mi

- The Sound of Music (1959, music by Richard Rodgers, lyrics by Oscar Hammerstein II)

Investors used to think that starting at the very beginning meant examining corporate earnings. After all, buying stock in a company (or through a stock mutual fund) is a bet that the company will increase its ability to earn money over time. Yet there is ample proof that companies are having a harder time making money by selling more goods and services and have instead been relying more on cost containment and financial engineering to meet their earnings objectives.

S&P 500 corporate profits are expected to rise 2.9 percent in Q1 vs. a year earlier, according to analysts polled by Thomson Reuters, which would be a slowdown from 5.4 percent in Q1 and 6.2 percent in Q4. But those diminished earnings are coming on projected revenue growth of only 1.6 percent. “If companies are having a harder time making money, then why is the stock market rising?” asked a caller to my radio show recently. The answer to that question requires that we start at another beginning…or with Ben Bernanke.

In January, I jotted down 7 reasons why the stock market rally could extend well into 2013:

(1) (2) (3) The Federal Reserve is maintaining its low interest-rate policies (including the monthly purchase of $85 billion worth of bonds) until employment improves substantially

(4) Japanese officials have started to address the country’s multi-decade economic stagnation

(5) Europe is no longer on the precipice of disaster

(6) The much-feared hard landing in China never came to fruition

(7) U.S. housing is finally contributing to economic growth

You get the joke…Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market move. Without easy monetary policy in place, all of the other factors would not have boosted stocks to the levels that we are seeing now. Last September, the Fed launched its current round of bond buying (QE3) and also said that it would maintain low short-term interest rates until mid-2015. The announcement and the subsequent December pledge to keep the program open-ended sparked a rally in global equities.

Everything was honky dory until May 22^nd, when during Congressional testimony, Bernanke raised the prospect that the central bank could downshift from its accommodative policies, if economic data were to improve. The subsequent 7½ weeks were volatile for every asset class, with most (bonds, gold, emerging stocks) heading lower. The exception has been the U.S. stock market -- the S&P 500 and Dow Jones Industrial Average tumbled about 7 percent from their intraday record highs in June, before recouping all of those losses and recording a new nominal closing high by the close of trading on Friday.

If the boomerang stock market started its journey with Bernanke’s comments, it makes sense that markets would return home after another Bernanke speech. In it, the Chairman underscored that the central bank would continue to pursue highly accommodative policies for the “foreseeable future,” due to a weak labor market and low inflation. This time, investors took Bernanke at his word.

This week’s key event puts Ben Bernanke back on the hot seat for his semi-annual testimony to the House on Wednesday and to the Senate on Thursday. It is expected that the Chairman will draw a distinction between tapering bond buying, which is likely to begin at either the September or December Fed meeting, if all goes well in the economy; and raising interest rates, which is not likely to occur until 2015. Bernanke and company will have a lot more data to chew on between now and the September 17-18 FOMC meeting, including two more employment reports.

Markets: The risk-on trade was ON…at least for another week. For the 25th time this year, the Dow closed at an all-time closing record. The S&P 500 hit its 19th record close of the year, and the NASDAQ hit its highest closing price since September 2000.

• DJIA: 15,464, up 2.2% on week, up 18% on year (Inflation adjusted high: 15,731)
• S&P 500: 1680, up 3% on week, up 17.8% on year (Inflation adjusted high: 2036)
• NASDAQ: 3600, up 3.5% on week, up 19.2% on year (All-time closing high 5,048 on 3/10/00)
• 10-Year Treasury yield: 2.59% (from 2.72% a week ago)
• Aug Crude Oil: $105.95, up 2.6% on week
• Aug Gold: $1277.60, up 5.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.58 (up $0.11 in a week)

THE WEEK AHEAD: Bernanke’s testimony and earnings season will dominate. Readings on Retail Sales are likely to show an increase, due to a spike in energy prices and consumer inflation at the core level should remain tame.

Mon 7/15:

Citigroup

China GDP

The trial of former Goldman Sachs employee Fabrice “Fab” Tourre begins. He is charged with misleading investors in a mortgage deal begins

8:30 Retail Sales

8:30 Empire State Manufacturing Survey

10:00 Business Inventories

Tues 7/16:

Goldman Sachs, Coca-Cola, Yahoo

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 7/17:

American Express, Bank of America, BNY/Mellon, eBay, IBM, Intel

8:30 Housing Starts

10:00 Ben Bernanke testifies before House

2:00 Fed Beige Book

Thurs 7/18

Capital One, Google, Morgan Stanley, Verizon, Microsoft

8:30 Weekly Jobless Claims

10:00 Ben Bernanke testifies before Senate

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 7/19:

GE, Honeywell, Schlumberger

Week ahead: Fed Up, geopolitical risk reemerges

The Labor Department said the U.S. economy created 195,000 jobs in June and the unemployment rate remained at 7.6 percent. There was something for everyone in the report. Optimists focused on the fact that employment is trending higher. The previous two months were revised up, bringing total monthly job creation to just over 200,000 this year, ahead of last year’s pace of 175,000. And although the unemployment rate remained steady, it did so by absorbing 177,000 new workers into the workforce. Pessimists will underscore that there are still 11.8 million Americans out of work and the quality of many of the jobs was weak, with 75,000 new positions coming from low paying jobs in the leisure and hospitality industry. As far as the rate holding steady, pessimists note that a slew of part-time workers (360,000), many of whom would likely prefer full-time employment, boosted the workforce. As a result, the broad unemployment rate (unemployed, disgruntled and part time workers who would prefer full-time) jumped from 13.8 percent to 14.3 percent in June.

On a low-volume day, the optimists won the day, interpreting the report as proof that the economy was improving, but not by so much that the Fed would alter policy before its September meeting. Stocks gained ground, but the bond market was less convinced as 10-year treasury prices slumped and yields increased to 2.72 percent, the highest level in almost two years.

Is this what the rest of the year is going to be like? Since May 22^nd, after Fed Chairman Ben Bernanke testified before Congress and raised the prospect that the central bank could downshift from its accommodative policies if economic data were to improve, investors have been throwing a “Taper Tizzy.” Every day is highlighted by the question, “When and by how much will the central bank taper its bond buying?”

This week, the Fed-funk is likely to continue, after the release of the minutes from the last policy meeting. You might recall that was the meeting after which Chairman Ben Bernanke attempted to soothe investors with more details about the conditions under which the Fed would take its foot off the gas. Instead of the intended calming effect, Bernanke inflamed the situation and volatility spiked across all asset classes.

Taking the Fed at its word, we know that the exit strategy is a work in progress, which will be driven by economic data. Capital Economics sees five stages of the Fed’s exit plans. From an investor perspective, these stages might seem to match Elisabeth Kübler-Ross’ “Five Stages of Grief”:

(1) Taper monthly asset purchases this fall (DENIAL)

(2) End bond purchases completely by mid-year 2014 (ANGER)

(3) Modify forward guidance language included in FOMC policy statement (BARGAINING)

(4) Raise short-term interest rates in 2015 (DEPRESSION)

(5) Begin to sell Fed’s holdings of Treasuries starting in 2017 (ACCEPTANCE)

Regardless of the exact timing and staging, these steps will occur and the quicker investors adapt and accept them, the better off they will be.

For those who were getting sick and tired of the constant Federal Reserve naval-gazing, there is something new to agitate raw nerves: geopolitical risk. In the two years since the Arab Spring, there hasn’t been much discussion of geopolitical risk, which is loosely defined as the risk that an investment's returns could suffer as a result of instability in a country, due to a change in government, legislative bodies, other foreign policy makers, or military control. The situation in Egypt has all of the components necessary to qualify and has already pushed up crude oil prices -- NYMEX crude breached $100 per barrel for the first time in over a year. Thankfully, those increases have not translated to higher prices at the pump yet.

As a reminder, Egypt is not a major oil producer and has been a net oil consumer of oil since 2008. However, its control of the Suez Canal and its proximity to large Middle East oil exporters puts investors on alert whenever there is political unrest. Approximately 2.5 million of barrels of crude oil pass through the Suez Canal or the Suez-Mediterranean (SUMED) pipeline each day. Any disruption to the flow of oil could have ripple effects throughout the region.

Markets: In a holiday-shortened week, stocks benefited from a surprise announcement from across the pond. For the first time, both the Bank of England and the European Central Bank provided investors with forward guidance. Both central banks will maintain their aggressive policies for an extended period.

• DJIA: 15,135, up 1.5% on week, up 15.5% on year
• S&P 500: 1631, up 1.6% on week, up 14.4% on year
• NASDAQ: 3479, up 2.2% on week, up 15.2% on year
• 10-Year Treasury yield: 2.72% (from 2.49% a week ago, yield now at 23-month high)
• Aug Crude Oil: $103.22, up 6.9% on week
• August Gold: $1212.70, down 0.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.47

THE WEEK AHEAD: Q2 earnings season kicks off this week. S&P Capital IQ predicts earnings to increase by 2.9 percent from the same period a year ago and for the full year to rise by 6.3 percent from 2012.

Mon 7/8:

Alcoa

3:00 Consumer Credit

Tues 7/9:

7:30 NFIB Small Business Optimism Index

Weds 7/10:

2:00 FOMC Minutes

4:10 Ben Bernanke delivers speech commemorating 100th anniversary of the Federal Reserve

Thurs 7/11

Bank of Japan rate decision

8:30 Weekly Jobless Claims

8:30 Import/Export Prices

Fri 7/12:

JP Morgan Chase, Wells Fargo

8:30 Producer Price Index

9:55 Consumer Sentiment

Week ahead: Halftime for economy: Bumpy ride ahead, jobs in focus

The first 6 months of the year is in the books, so it’s a perfect time to check in on the U.S. economy’s progress thus far, and to look ahead to the second-half of 2013. Economic growth: Recovery from the Great Recession has been sub-par (the post World War II growth rate for the U.S. is 3-3.5 percent), with growth averaging about 2 percent since 2010. Q1 growth was revised down to 1.8 percent from 2.4 percent and Q2 is expected to be similar to Q1, due to the lingering effects of sequestration. But economists believe that activity should pick up towards the end of the year and that total growth for 2013 will be between 2 and 2.5 percent. The pace of growth is due to accelerate to 3 percent next year, but this seems like a long way off.

Jobs: 5 months into the year job growth has been good, not great. The economy has added an average of 192,000 non-farm positions per month in 2013, ahead of the 175,000 monthly pace seen in the previous two years; and the unemployment rate has edged lower to 7.6 percent from 7.8 percent in December. Still, there are 11.8 million Americans out of work, 4.4 million of whom have been unemployed for more than 6 months. So while layoffs have tapered off, economic growth has been too weak to spur widespread hiring. Most economists predict that June job creation will be approximately 150,000 – 160,000, due to recent softness in manufacturing data.

Housing: Housing is finally recovering from the abyss. Sales have increased and prices have made great advances, though from low levels. The recent Case-Schiller house price index showed increases of 12 percent from a year ago, but housing experts note that double-digit advances are not sustainable, especially as mortgage rates have spiked and sellers will likely to return to the market in greater numbers. The slow down should not be read as another leg down in the housing market, but a new phase in which growth is normalized.

Consumers: The first half of the year has been pretty good for consumers. Americans' debt obligations have eased as a percentage of their disposable income, household net worth has surpassed its 2007 peak and consumer confidence shot up to the highest level since 2008. Still, incomes have remained mired at similar levels to where they were 10 years ago. But for tame inflation, stagnant wage growth would be a bigger concern.

Federal Reserve: We can divide Q2 into two periods: before May 22^nd, which I propose we call “BB” or “Before Bernanke” and after May 22^nd, which can be referred to “AB”, or “After Bernanke”.

• BB: From April to mid-May, stocks marched higher, due to the Fed’s easy monetary policies; a surprise announcement from the Bank of Japan about its own stimulus plans; better than expected corporate earnings; the continued recovery in housing; Europe stepping back from the precipice of disaster; and the much-feared hard landing in China never coming to fruition.
• B-Day (Bernanke Day): On May 22^nd Fed Chairman Ben Bernanke testified before Congress and raised the prospect that the central bank could downshift from its accommodative policies (which were intended to drive down borrowing costs, push up asset prices and encourage more investment, spending and hiring in the broader economy) prior to Labor Day, if economic data were to improve. On that day, the Dow reached a fresh intra-day nominal high of 15,542. The bond market had already started to price in future Fed action, as the yield on the 10-year treasury spiked to 2.12 percent at the end of May, from 1.62 percent earlier in the month.
• AB/Stocks: The balance of the quarter was highlighted by huge gyrations in all markets, due to worries about when the Fed might pull back on its bond-buying. The height of the anxiety occurred after the June 19Fed Open Market Committee meeting. The S&P 500 index fell 7 percent from its intraday record high, before recouping some of those losses and finishing the quarter 3.8 percent below the record high. The AB period was marked by rampant volatility, with the Dow logging 16 triple-digit moves in June, the most in a month since Oct 2011.
• AB/Bonds: The 10-year bond yield climbed as high as 2.66 percent, before settling at 2.49 percent at the end of the quarter. . Treasury bonds handed investors a loss of 2 percent this quarter, the worst quarterly decline since the fourth quarter of 2010. While the jump in yields and drop in price has been sudden, 2.5 percent is still considered a low level.

More on bonds: Historically, the yield of the 10-year runs 1.5 to 2 percentage points higher than the inflation rate, which would suggest yields should be closer to 3 percent, even higher than the current 2.5 percent. While the move in bonds has probably been more violent than the Fed would have expected, the central bank would like to see both stocks and bonds return to more normal pricing. For those worried that the recent rise in long-term interest rates will derail the recovery, it is worth remembering that when the bond market plummeted in 1994 and yields surged, the subsequent five years saw unusually strong economic growth and large gains in stock markets.

What to expect in the second half of the year: Market volatility is likely to remain elevated, as each economic report will be parsed through the lens of “What will the Fed think about this report?” Global markets have become dependent on the Fed's unprecedented accommodative policy, including its monthly purchase of $85 billion worth of bonds (QE3). Due to the unusual nature of the Fed’s stimulus plans, it is difficult to draw on previous periods to help predict how the change in policy will impact the economy and markets. The very fact that we have not been here before is creating investor uncertainty, which is why the anticipated shift in Fed policy will likely remain the chief investment concern for the balance of the year.

Markets: June was the first losing month of the year for stocks, but all three major averages logged their third winning quarter in four and remain solidly ahead for the year. The Dow has seen its strongest first half of the year since 1999 and the S&P 500’s first half performance is its best since 1998. Volumes could be light this week due to the Independence Day holiday, but there will be plenty of action on the calendar, including policy committee meetings by the Bank of England and the European Central Bank, and the monthly jobs report in the U.S.

• DJIA: 14,909, up 0.8% on wk, down 1.4% on month, up 2.3% on quarter, up 13.8% YTD
• S&P 500: 1606, up 0.9% on wk, down 1.5% on month, up 2.3% on quarter, up 12.6% YTD
• NASDAQ: 3403, up 1.4% on wk, down 1.5% on month, up 4.1% on quarter, up 12.7% YTD
• 10-Year Treasury yield: 2.49% (from 2.514% a wk ago, biggest quarterly selloff since Q4 2010, worst first-half  return (-2.1%) since 2009)
• Aug Crude Oil: $96.56, up 3% on week
• August Gold: $1223, down 5.3% on wk, down 23% on quarter (worst quarter since the start of modern gold trading in 1974), down 30% YTD)
• AAA Nat'l average price for gallon of regular Gas: $3.50

THE WEEK AHEAD:

Mon 7/1:

8:58 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Tues 7/2:

Motor Vehicle Sales

10:00 Factory Orders

Weds 7/3:

7:30 Challenger Job-Cut Report

8:15 ADP Employment Report

8:30 International Trade

1:00 US markets close early for Independence Day

Thurs 7/4: US MARKETS CLOSED FOR INDEPENDENCE DAY

Bank of England and ECB rate decisions

Fri 7/5:

8:30 Employment Report

8:30 Weekly Jobless Claims