First Quarter GDP Disappoints— Stock Markets Resume Rally

June 30th, 2013 | by Morris Beschloss | Comments

In the obfuscated world of financial investments and high speed computer trading, market directions not only turn on a split second, but for a shifting assortment of reasons over a period of time.

Currently, it’s all about the Federal Reserve Board and its intentions. Since financial institutions that do the bulk of stock/bond trading have focused on the Federal Reserve’s continuation of its huge quantitative easing, targeting $85 billion a month toward the U.S. Treasury’s ongoing debt auctions, and the major banks’ oversupply of mortgage-backed securities, this fed accommodation has kept interest rates artificially low. Even a hint that this might soon taper off, or even stop in the foreseeable future, was enough to cause traders to immediately hit the sell button almost two weeks ago.

Within minutes of chairman Ben Bernanke’s hinting of “taking the foot off the easing pedal,” at a post-Fed announcement press conference, stocks, bonds, and commodities started an immediate swoon. Conversely, interest rates spiraled upward, while the dollar strengthened substantially in relation to other leading world currencies. Gold, traditionally strongest during periods of inflationary anticipation, accelerated a downward plunge starting last summer. But the main conduit to watch going forward is the strength of trust that the U.S. liquidity markets retain in the long-term commitment of the Fed’s ongoing paymasters.

What reversed the stock markets’ three day plunge was mid-June’s unexpected official 1.8% first quarter annualized gross domestic product growth. Normally, this would be a cause for a long term stock market swoon, traditionally weaned on price-earning ratios, revenue growth, and bottom-line profits.

But with the current entitlement mentality, created by the Federal Reserve’s monthly guaranteed fixed payments, the weaker first quarter gross domestic product report, signaled that there will be no back-off from either the amount ($85 billion), which had been cast in doubt by economic upturn as seen by the Fed, which triggered a warning that the Federal Reserve’s objective would engender a tapering, leading to a sooner than planned termination.

With a more realistic “maintenance and repair” economic outlook indicated by responsible analysts, financial markets should stabilize until the end of the 2013 fiscal year ending on September 30. At that time, the White House/Congressional continuing resolutions will come to an end; and the “real world” of debt ceiling and reassessing the impact of budget deficits, as well as additional 2014 Obamacare taxes, will have to be faced realistically going forward.

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