Fed dumps cold water on rally | The Mesh Report

Fed dumps cold water on rally

Christian Tharp, CMT July 15, 2010 0

A weaker economic forecast from the Federal Reserve stalled the stock market’s winning streak as stocks closed flat on Wednesday. Although the Dow Jones industrial average did manage to squeak out almost 4 points for its seventh straight advance, the S&P 500 finished flat on the day. Tech stocks had a slightly better day as the Nasdaq climbed 7 points. Bond prices also rose again as investors remain uneasy about the strength of the economic recovery.

The Federal Reserve’s economic outlook was a little more downbeat than their previous forecast from back in April. Since the country’s economic recovery and the strength of it are still on the forefront of investor’s minds, the Fed’s assessment was a sharp reminder that economic growth could be a rough ride and take some time.

The markets seemed to struggle between the disappointment if the Fed’s statement and the upbeat earnings forecasts from Alcoa Inc. and Intel Corp. Investors initially sold on the Fed’s statement. Earnings season has begun and investors may be hoping the strong earnings start will continue and temper any economic recovery concerns.

Some of the highlights from the Fed’s statement were the lowering of its projection for the gross domestic product (GDP), which is the broadest measure of the economy, and said GDP will grow between 3% and 3.5% this year. That’s a reduction from the 3.2% to 3.7% forecasted in April’s statement. The Fed also said that the unemployment rate, which is currently at 9.5%, would at best fall to 9.2%. This is a slight bump up from April’s 9.1% projection.

In yet another reminder of the debt issues in Europe, the Fed also stated that “economic developments abroad” could hurt the U.S. economy. This is an obvious reference to the ongoing debt crisis that started in Greece and threatens to spread amongst other European countries.

After selling stocks throughout the spring, investors remain very cautious, more than in any down cycle in recent memory. That caution is reflected in how investor’s money continues to flow into bonds. Bond prices rose, which pushed interest rates lower in the Treasury market. Investors appear to believe that government debt is a safer place to put their cash with the questionable economic outlook. As a result, the yield on the 10-year Treasury note fell from 3.13 percent late Tuesday to 3.05 percent. The yield on the 10-year helps dictate interest rates on mortgages and other consumer loans.

It appears that there is a tug-of-war between concerns about the economic recovery and the strong earnings that companies continue to put up. As the earnings season gets into full swing, investors will have to choose between what appears to be a stumbling economy and the companies that appear to be weathering the storm.

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