Breakout

Look for Tortured Markets as Bernanke Walks a Political Tight Rope

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We're off and running again, plowing head first into a brand new year, exactly where we began a year ago. Talk about deja vu! Conventional wisdom is predicting (probably inaccurately) that the current status of things will continue, that the volatility and fear that earmarked 2011 will likely carry on in 2012, only with a stronger odeur du politics. Of course, making predictions 12 months out seems sort of quaint nowadays, when a forecast for the end of the quarter is considered to be long-term insight.

And yet, with seemingly all calendars set on pause until Friday morning's release of the December payroll report, there are some traders out there who feel we may get a glimpse of an even more important barometer today from the normally mundane "Fed minutes" --details from the previous meeting of the Federal Reserve's Open Market Committee (FOMC) where they voted to change the way they are going to communicate.

"The first step is going to be taken with the release of the minutes," says John Canally, chief financial economist and investment strategist at LPL Financial. He thinks the notes released at 2pm/et will not only show that talks were heated (e.g. a more divided Fed), but they should tip off what they Fed will do at its next 2-day meeting and press conference later this month.

"I think they're likely to come out with a target of maybe an inflation rate, maybe nominal GDP or maybe just as simple as telling us what their Fed Funds forecast is," Canally predicts. "The Fed is the only game in town for the economy right now."

While he thinks Ben Bernanke would like to do QE3, he says the Fed chairman's "political hands are tied" and thus any action will be difficult and scrutinized.

"Bernanke has to be very careful this year not to rile up his bosses," Canally says.

As for the broader markets, Canally is among those predicting a volatile new month and new year that will see stocks largely contained until the Fall after the election is over.

"It doesn't really matter what the outcome is, whether a Democrat wins or a Republican wins or an incumbent wins - it doesn't really matter. What matters is that the market knows the result," he says.

Once it does, it will rally. In the meantime, the LPL strategist is touting a total return outlook of 8 - 12% for 2012, that is based on a formula of 7% earnings growth, "a tiny increase in the PE ratio," and a 1-2% bump from dividends.

In an environment of sub-par 2% GDP growth, Canally thinks Technology, Industrials and High Yield will do well.

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