The newly constituted FOMC voted unanimously to maintain its low interest rate policy and continue its QE2 program of buying Treasury bonds to the tune of $600 billion by midyear. If there was a surprise to emerge from this week’s Fed policy meeting, it was that there was no dissent among the new members of the Open Market Committee on continuing to pursue aggressively stimulative policy. Rumored to be more hawkish than the voting members they replaced (with the exception of outgoing vote Thomas Hoenig of the Kansas City Federal Reserve Bank), the new members gave a stamp of approval to existing Fed policy and the ongoing characterization of the economic recovery as disappointingly slow and still in need of the assistance of zero interest rates and QE2. With respect to inflation, while the post-meeting statement from the Fed made a nod toward higher commodities prices, it also reiterated the Fed’s earlier view that inflation is not a near-term problem, noting that “longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”
U.S. new homes sales bounced higher by 17% in December from the low levels of October-November. The latest month’s data are seasonally suspect, and a truer representation of the state of housing might be given by looking at average sales for the fourth quarter, which were 2% above the Q3 average, but 18% below the home-buyer-tax-credit-boosted Q1 sales rate. Likewise, the jump in median sales price for December to the highest level in almost three years is likely to have been distorted by the jump in sales in the western U.S., where home prices are generally higher. Yesterday’s S&P/Case-Shiller home price report showed lower, not higher, prices. Perhaps the best indication that a bottom may be forming in housing is seen in the chart below plotting the inventories of unsold new and existing single-family homes. While the stock of existing homes remains high, it has moved down off this past summer’s highs; unsold new homes on the market is at a 42-year low.
Post FOMC meeting, stock prices declined initially, then rose to the day’s highest levels, and ended the day a roughly the pre-meeting levels, just under 12000 for the Dow and just under 1300 for the S&P 500. The Dow’s gain for the Wednesday was less than 0.1%, but Nasdaq and the S&P 500 were higher by 0.7% and 0.4%, respectively. The Dow and S&P 500 hit new two-year plus highs; Nasdaq closed 1% below its three-year high hit one week ago. Treasury bonds sold off today, in part on the stronger stock pricing and judging by the coincidence of timing in part to reaction to the Fed’s non-decision at today’s FOMC meeting. The 10-year Treasury nor lost about two-thirds of a point, its yield rising to 3.42%, about eight bps on the day.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011. At some point, the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen lately in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011, although so long as earnings prospects remain favorable the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.