From last Tuesday's Hilsenrath Rally through Friday's close, the S&P 500 tacked on a stunning 4% worth of gains. With the FOMC announcing their decision on rates on Wednesday, followed by Nonfarm Payrolls on Friday, the burden of proof is on the bulls to show the market actually "deserves" those gains. Convincing the Street to really believe in the markets again needs to start with jobs.
"[For] guys like me who've been really bullish on employment, the numbers haven't worked out really well," says Lee Munson, founder of Portfolio LLC and author of Rigged Money. "I'm starting to get a little anxious, so the Fed is just what I need to accommodate my fears."
Fortunately for Munson and other bulls, the economy and stocks are at one of those periodic junctures where most forms of bad news are bullish. It works like this: right now the economy has bad employment data coupled with neither GDP growth nor inflation (at least as measured by the government's CPI and PPI data). Bernanke literally wrote the book on aggressive monetary stimulus in situations such as the one we find ourselves in now. Bad news leads to stimulus, which props up assets. Hold your nose and buy when the Fed prints money has proven to be the best way to invest over the last few years.
With hundreds of billions in stimulus having already been thrown at the economy to no avail, Munson says the Fed is going to try more of the same, only much, much bigger. "They've gotta double-up the dose from last time," he says, comparing traders to steroid addicts. "That means $500 to $700 billion of our taxpayer money."
Half a trillion or more would make an amazing headline but would be unlikely to do anything tangible. Bernanke himself has been howling about the limitations of monetary efforts for years. American business is liquid enough to make investments. Taking rates on the U.S. 10-year treasury from 1.5% to 1% isn't going to create additional incentive for companies to start building plants and buying equipment. As a manager, if you don't know how expensive it's going to be to hire employees in terms of taxes and healthcare, you aren't going to make investments. Not all the free money in the world can change that fact.
All of which is for another column. Traders generally believe Bernanke is going down the wrong path, but they'll try to make money off his decisions anyway, which brings us back to how to play the Big News Week ahead. Munson says newcomers to the rally should wait for a better offer.
"If you haven't done your buying last week, I think you're late to the game," he says, "you should go to the beach."
