Wall Street Takes Profits and Blames the Fed

by John M. Curtis
(310) 204-8700

Copyright June 20, 2013
All Rights Reserved.                                      

      Squeezing profits out of unprecedented gains, Wall Street blamed Federal Reserve Board Chairman Ben S. Bernanke for daring to suggest in his June 19 Federal Open Market Committee meeting that he’ll begin to taper $85 billion month bond-buying program known as QE3.  Fed bond purchases have helped hold down long-term interest rates, especially mortgage interest rates that have been at historic lows.  June, July and August have always been Wall Street’s profit-taking season, where the nation’s biggest funds unload shares, hammer down the market and ready the Fall’s buying trend.  Saying he sees an improving economy, Bernanke signaled that the Fed’s bond-buying program could taper off this Fall, though he left an out should the unemployment picture head south.  “This feels like an overreaction, the Fed didn’t tell us anything we didn’t already know,” said Jeff Kleintop, chief market strategist for Boston-based LPL financial.

          Since President Barack Obama took office Jan. 20, 2009, the Dow Jones Industrials has risen from about 8,000 to today’s close at 14,881, around 90%.  Most markets can’t go up indefinitely without selling off.  Bernanke gave markets the perfect excuse to take profits, despite the overall upward trend.  When the Fed chairman said the economy was improving, it signaled the Fed needs to do less to prop up the economy.  Beranke’s QE1, QE2 and QE3 have kept banks liquid to offer borrowers enough cheap credit to stimulate consumes demand.  Big-ticket items like real estate and cars have grown strongly together with consumer electronics, always positive for the economy.  University of Michigan’s Consumer Sentiment Index has been at pre-recession highs.  “It’s hard not to cheer for the unemployment rate getting down to 7% [from its current 7,6%.  Bernanke has hinted that he’d raise the Federal Funds Rate when unemployment dropped to 6.5%.

         Wall Street knee-jerk reaction locks in profits for the biggest mutual, private equity and hedge funds, while stock prices trend downward.  Without some sell-off now approaching 5%, share prices inflate too high to encourage new investors from jumping in.  Rises in long-term interest rates could hurt the real estate market that’s made a solid recovery from the dog days of 2008-2010, when real estate bottomed out.  While long-term rates are still at historic lows, some economists fear that rising interest rates could throw cold water on the real estate recovery.  Real estate investors help fuel healthy consumer spending, something essential to companies’ earnings growth.  “The risk is if rising rates start to negatively impact the housing picture,” said Kleintop, through the real estate market shows far more resiliency than the stock market.  It takes much more than a quarter or half-a-percent increase in mortgage rates to kill the housing market.

          Calling the market downturn “probably not over” and a “pause phase,” Wells Capital Management Chief Investment Strategist James Paulson sees markets moving sideways for the next six months.  “So there’s sill quite a bit of upside for the valuation of the market,” said Paulson, predicting the S&P would finish the year at 1,650,  When you consider today’s S&P close at 1,603, that’s not too much on the upside.  While Paulson doesn’t see a catastrophic drop, he still doesn’t see too much upside momentum going forward.  Earning weigh heavily on whether stock valuations continue to move upward.  If real estate remains steady, it’s going to help prop-up the stock market from going into a bear market.  “But I think we’re going to kind of oscillate her the rest of the year between maybe slightly below 1,600 and slightly above 1,700,” said Paulson, pointing to good times for market-neutral hedge funds, not mutual and private equity funds.

         When market-makers like Goldman Sach take enough profits and hammer down shares between 10%-20%, they’ll send out buy signals driving share prices back up.  Analysts like Kleintop or Paulson aren’t too worried about today’s sell-off because investors have few options other than the stock market.  While bond yields have risen about a quarter-to-half-of-percent, it’s not enough to drive investors back into bonds.  Before investors panic and bailout in what’s known as a bear market, most economists—except New York University’s Stern School economist Nouriel “Dr. Doom” Rubini—expect the market to eventually recover from the current downturn.  When Goldman Sachs sends out the buy signal, markets will once again ratchet up, whatever Bernanke plans to do.  With his term ending this Fall, it’s doubtful hell get reappointed.  Look for Barack to pick a like-mined successor to Bernanke, like Vice Chairman Janet Yellin.

           Beranke’s signal about possibly tapering QE3 later this fall is contingent on whether or not the unemployment rates continues to drop.  If unemployment ticks upward, Bernanke could postpone any change in QE3 indefinitely.  Wall Street’s current sell-off has little to do with Bernanke and more to do with seasonal profit-taking—a necessary evil in the investment  business.  While investors often panic when the big funds unload shares and drop the market, profit-taking is Wall Street’s normal way of doing business.  Whether Bernanke goes or stays this Fall, Wall Street will adjust to whatever Fed policies drive markets up-or-down to maximize profits.  Pointing to the Fed, domestic or world events, distracts investors from seeing what’s really behind Wall Street’s ways of making profits.  Private investors have no way to second-guess which way markets will go, riding out the ups-and-downs before panicking and bailing out.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.