Lately, global stock markets have rallied on hopes that Europe is close to finding some relief to the economic situation there, and that the Federal Reserve will provide more help to the lackluster U.S. economy. The Fed has a two-day meeting this Wednesday and Thursday, and after a disappointing August jobs report last Friday, many believe that QE3 is coming this week. But the real question is, does the U.S. economy need more stimulus right now, or should the Fed possibly wait for when things are truly bad? It could be quite possible that if the Fed uses its bullets now, it may be too early with the upcoming fiscal cliff. Q3 now could easily mean QE4 sometime next year.
So does the Fed really need to act? Well, Friday's jobs report was not good, with only 96,000 non-farm payrolls added in August. But the weekly claims numbers haven't been terrible, lingering under the 375,000 level for a number of weeks. We haven't seen any spikes back above 380,000 lately, and we certainly haven't made any runs at the 400,000 level either. Plus, the ISM services report came in at a 53.7, well above expectations, meaning the service sector (the larger part of the U.S. economy) is doing better than people thought. Yes, the manufacturing sector is contracting slightly, with the ISM manufacturing number coming in at 49.6 this past week, but that is close to the neutral line of 50. For every bad report out there, you can find one that is equally good. Yes, things aren't great right now, but they are not terrible.
There tends to be a huge debate over the fiscal cliff and what will happen at the end of the year when tax cuts are scheduled to expire. If tax rates go back up, it could easily take a chunk out of spending, and some say this could push the U.S. back into recession. Investors do need to watch closely, because if the capital gains rates rises from 15% to 20% on long-term gains, they may want to adjust their portfolios before the year ends (I'll discuss that impact in future articles). If the economy tanks in early 2013, wouldn't it be better to use QE3 then? It's certainly something to think about.
Consumers may already be feeling a pinch, as the national average for regular gas is back above $3.80. We have heard rumors of a Strategic Petroleum Reserve release, and it might be a definite if the gas price average gets closer to $4. Gas prices are about 15 cents higher (on average) than this time last year, and that makes a difference, especially going into the holiday spending season.
On the other hand, if we inject more stimulus into the economy and just try to spend our way out of it, there will be some short-term progress, or so is the hope. The problem is that the Fed can only keep rates low for so long, as they will eventually start rising again. If the deficit continues to expand at rapid rates, increasing rates will cause the cost to service the country's debt to soar, and that will create problems of its own.
It seems like the markets are really expecting QE3 this week, with the S&P 500 (
SPY) rallying to new 52-week and multi-year highs this past week. In fact, the S&P 500 is now up 100 points since July 25. Equities have rallied strongly, despite the fact that Q2 earnings were not great. Also, the markets recently shrugged off a revenue warning from Intel (
INTC), which implied the entire computer sector could be in for a weak second half of the year. That dents the hope that Microsoft's (
MSFT) Windows 8 launch would help out struggling PC makers. Dell (
DELL) and Hewlett-Packard (
HPQ) recently hit 52-week
lows after bad earnings reports.
