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August 31, 2011 at 08:36 PM
Hope is not an investment strategy. Yet, the stock market’s fate seems to be closely tied to Bernanke’s Jackson Hole comments and the hope of QE3. Bernanke’s 2010 Jackson Hole comments breathed life into the markets. Did his 2011 Jackson Hole pep talk deliver the needed hope or was it another nail in the coffin?
Below is a thorough analysis of Bernanke’s 2011 speech along with a comparison to the 2010 speech. More importantly, we will discuss what the market thinks the odds of higher prices are.
The parallels between the timing of the 2010 and 2011 speeches and the stock market’s (VTI) performance are quite amazing. It explains why investors put their hope in QE3.
Parallels: For Better, For Worse
Amidst an avalanche of hope and optimism, the S&P 500 (SPY) Dow Jones Industrials (DIA) and Nasdaq (QQQ) peaked on April 26, 2010, with the S&P at 1,220. On April 16, 2010, the ETF Profit Strategy Newsletter warned that: “The combination of sentiment extremes clearly point towards a correction. The upside potential is much more limited compared to the massive downside risk.”
From April to July, 2010, the S&P tumbled 17% and delivered a never-before-seen “Flash Crash.” It was Bernanke’s August 27, 2010, speech that marked a turnaround for stocks.
In 2011, the major indexes peaked on May 2 at 1,371. The ETF Profit Strategy Newsletter warned of an impending top on April 3, 2011: “A major market top is forming. In terms of resistance levels, the 1,369 – 1,382 range is a strong candidate for a reversal of potentially historic proportions.”
So far, the S&P lost as much as 19%. Will Bernanke’s speech mark another turnaround?
2010 vs. 2011
Today’s Bernanke speech fills 11 pages. He spends about four pages talking about how bad the economy is, four pages on why the Great America will come back and three pages on suggestions for lawmakers.
In other words, 80% of Bernanke’s speech could be summed up like this: “We have learned that the recession was even deeper and the recovery even weaker than we had thought. With respect to the longer-run prospects, however, my own view is more optimistic.”
The only statement pertaining to a potential QE3 was this one: “In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting.
“We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion,” he continues. “The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
As comparison, here are the words that sent stocks soaring in 2010: “The FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. Regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery.
“A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities,” he said a year ago. “I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.”
