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Ignoring the latest spike in Spanish bond yields and big drop in German investor confidence, stocks jumped Tuesday. In recent trading, the Dow was up 156 points, or 1% while the S&P 500 was up 1.3%.
Better-than-expected U.S. housing data certainly helped the mood but the rally was largely driven by expectations for more action by the Federal Reserve at this week's policy meeting, which concludes Wednesday.
"There's a lot of hope out there we'll see something out of the FOMC tomorrow," says David Rosenberg, chief economist and strategist at Gluskin Sheff. "There's no question the market is positioned for the Fed to announce something very big tomorrow, probably in the form of another round of quantitative easing."
In keeping with his bearish reputation, Rosenberg believes the bulls will be "disappointed" by the Fed meeting.
First, he does not believe the FOMC will announce another round of quantitative easing (at least not this week.) Second, and more importantly, he (among many others) notes the half-life of each successive Fed action has been smaller than the last.
"You may get a bout of near-term euphoria but what I think what's more important for investors is the impact from these rounds of quantitative easings are increasingly losing their allure," Rosenberg says. "The impact on risk appetite could last a couple of days or a couple of hours but it's not going to have nearly the same impact as it has previously."
More importantly, there's nothing the Fed can do to resolve Europe's fundamental crisis or address the looming U.S. 'fiscal cliff', he says. "There's abundant uncertainty right now and, frankly, monetary policy is a very blunt tool to deal with fiscal policy uncertainty."
Still, every trader knows you 'don't fight the Fed' and hope springs eternal on Wall Street for more action from Ben Bernanke.
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
