In the meantime, the Fed holds its annual symposium in Jackson Hole, Wyoming. This is an important meeting of central bankers worldwide (except ECB’s Draghi). It is very informal, with the most important conversations held in hallways and outdoors, viewing the majestic Grand Teton mountains.
Fed chief Bernanke will speak this Friday. Two years ago, he announced the first quantitative easing program at this meeting. While he is expected to announce another round of quantitative easing next month, he is not expected to say anything significant this Friday. If he does say anything significant, the stock market is not likely to over-react as it usually does, because traders have cleared out for one last long weekend of vacation before the Fall season begins.
The Fed hates this time during the election cycle anyway. Any action they take or don’t take right before the election is considered “political.” They are indeed damned if they do and damned if they don’t.
Next week, the Europeans begin returning from vacation, which is a far greater risk to our market. There have been some hopeful signs, such as that Merkel has been urging other leaders to tone down their rhetoric and has been letting her Finance Minister take the lead. Her approval numbers have increased, giving her a little more negotiating room. But, in the end, Europeans will produce more drama than results, which drives the stock market crazy. I expect significant downside risk over the next few months because of Europe.
Then, in case you forgot, there is a U.S. Presidential election. I was hoping either party will win by a clear, foreseeable landslide. However, as the election is apparently so tight, the stock market may go into election night with no idea of whether to buy or sell the next day. Take comfort in the fact that the stock market is generally bullish during November and December of each Presidential election year.
That traditionally bullish close to the year may not happen this year, as we are approaching the dreaded Fiscal Cliff, when tax rates go up and government spending goes down. I’m not as worried about that happening as before. Only the Tea Party seems driven by principle to go over the cliff. Both the Establishment Republicans and Democrats are willing to “kick the can down the road.”
Maybe, the Tea Party is right? Maybe, a 5% recession is worth it, in order to finally deal with the issues. (The last one was a 6.4% recession.) But, would the Tea Party be willing to negotiate even then, once we are over the Cliff? If not, it would be worse than a 5% recession.
So, hit the snooze button and enjoy the end of summer . . . you’ll need to be well-rested this Fall.