- The feds' inconsistent messaging—most recently "nationalization" remarks from Congress and Chairman Bernanke's speech Tuesday—has kept markets choppy.
- Yet beyond refuting the need for all-out nationalization, Bernanke's testimony forecast an economic recovery later this year, given healthier credit markets.
- If the recession ends later this year, or even sometime early next, broad stock markets should begin rising sooner rather than later in anticipation of that economic recovery.
Sometimes riotous youngsters yearn for a firm hand—their rebellion's born from inconsistent messages, not some diabolical desire to drive their parents mad. Though the feds are rarely (or ever?) good parents, perhaps it's an apt analogy for the last few months. After all, federal bureaucrats have been the portrait of well meaning inconsistency and markets largely misbehaving as a result.
For instance, hot heads in Congress prevailed last week, shouting scary words like ‘nationalization'. Markets tanked. We could just hear investors nervously wondering, "Will they? Won't they? Where the heck is this ship of fools bound?" Think back to last summer and fall, where every Friday afternoon we waited with bated breath to see if another big financial institution would be nationalized come Monday morning.
Almost on cue Tuesday, Fed Chairman Bernanke entered the fray firmly against the idea of all-out financial sector nationalization—and stocks recouped Monday's big loss with a big gain. Just as inconsistency in one direction can drive markets down big, inconsistency in the other direction can send them skyward—the very definition of volatility. The size of those swings only underscores these aren't normal times and that things other than pure fundamentals are causing markets to slosh around. Sure, it's important to listen to what our lawmakers and Fed chairmen have to say, but is their conjecture really worth trillion dollar market gains and losses on the global stock market scene? Probably not.
Like it or not, things haven't been business as usual lately. And investors want to know the plan. Will the Fed head's words hold water? Is he acting alone or does he have support where it matters? When will the next policy reversal hit? Impossible to know, and for markets, that means more shaky days . We can't imagine congressional hot heads coolly considering their words more carefully any time soon. (Even if they do apologize after the fact.)
Yet we can find some meat to salt in Bernanke's speech. Provided healthier credit markets (which Bernanke notes are improving, though still weak) the economy should begin recovering later this year, to consolidate its gains further in 2010. More encouraging, the wave of monetary and fiscal stimulus in the pipe will lend momentum to any fledgling recovery. He goes on to parse his words by vaguely categorizing downside risks as outweighing those on the upside—typical fedspeak. And just as vaguely he states we should expect the economic recovery to take a couple years without mentioning just what goal we're trying to reach. Pre-recession GDP? Some other arbitrary threshold?
Still, we wonder how much such shifty growth benchmarks will matter once the economic engine restarts in earnest. We've been saying it for a while now—if the recession ends later this year or even sometime early next, broad stock markets should begin rising sooner rather than later in anticipation of that economic recovery. The promise of future prosperity cures a rebellious market better than any dose of "good" parenting ever will.