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How Long Can The Fed Wait?

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    July 25, 2012

    As the last few days have emphasized, the problems of the last two summers are back in full force. In fact they’re more intense than in either of the last two summers.

    The economic recovery in the U.S. has been stumbling for three months. And whereas when it stumbled in each of the last two summers, at least corporate earnings remained strong, and earnings are the basic driving force of the stock market. This year as economic growth stumbles again, corporate earnings growth is also in sharp decline, and corporate warnings are coming at the fastest pace seen in ten years, (and the ‘fiscal cliff’ potentially coming next January adds a new major worry).

    Whereas the worries about Asian economies the last two summers were only that the tightening measures being undertaken to ward off their threatening inflation could possiblyresult in their economies slowing too much, this year their economies are slowing too much, and quite dramatically so.

    The euro-zone debt crisis popped up again in each of the last two summers, but as serious as it was, it ‘only’ involved the small periphery countries of Greece and Portugal. This time the crisis is back in a much more threatening way, involving Spain, the 4th largest economy in the euro-zone, as well as the return of Greece’s problems in a much more serious form.

    With global conditions so much more negative this time around, why is the Fed waiting to come to the rescue, as it did in each of the last two years?

    Is its reluctance due to lack of confidence in anything it might try now? It has already played its best cards, with only limited and temporary success.

    Its most powerful tool historically has always been its control over interest rates. When the economy is in trouble cut interest rates enough and the economy has always eventually recovered.

    But this time is very different. The Fed has had interest rates cut to zero for two years now, and has gone on in the last two summers with the experiments of QE2 and ‘operation twist’. And still the economy is unable to stand on its own feet.

    Meanwhile, the Fed has been seeing other countries where interest rates are still around 5%, giving them room to cut, cutting their rates to re-stimulate their economies, with no effect even from those efforts so far.

    Is the Fed being so slow this year because it fears it has nothing left and if it fires it off and it doesn’t work then what happens to investor and consumer confidence.

    Looking at that interesting short-term chart again.

    When I first showed you this chart a few days ago, the June rally had carried the S&P 500 (and other indexes) to the upper limit of the symmetrical triangle that had formed. The direction of the breakout from such a pattern usually indicates the direction of the market for a while.

    Now the pullback of the last two days has it at the bottom limit of the triangle.

    Will it bounce off again?



    Seasonality’s effect on global markets!

    We’ve provided a ton of information over the years on the effect of seasonality on the U.S. market, from our own research, from a number of independent academic studies, and from the performance in real-time of our Seasonal Timing Strategy over the last 12 years since I introduced it in 1999. But very little on seasonality in countries outside of the U.S.

    Today, we will remedy that in a substantial way, with an in-depth ‘Global Markets’ update later today in the subscriber’s area of the Street Smart Report website. And in this report we will have detailed information on seasonality in global markets, including a table of its effect on the performance in each of 18 individual countries from 1970 to 2012.

    To read my weekend newspaper column’ click here: A Mid-Year Update on the Market’s Seasonality. July 20, 2012

    Subscribers to Street Smart Report: In addition to the charts and signals in the Premium Content area of this blog post, the new issue of the newsletter from last Wednesday is in the subscribers’ area of the Street Smart Report website. And the in-depth mid-week U.S. market update will be there tomorrow, and the in-depth report on global markets later today.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!