Will the Fed Send Stocks Soaring Next Week?

Make no mistake about it: Next week is all about the Federal Reserve. On Wednesday afternoon, the central bank is slated to release its most recent statement on monetary policy. The guidance therein will almost invariably dictate the direction of the S&P 500 (SNPINDEX: ^GSPC  ) for the week.

Since September of last year, the Fed has purchased $85 billion every month in long-term Treasuries and agency mortgage-backed securities in an effort to reduce long-term interest rates and thereby fuel the ongoing economic recovery. "The Committee is concerned," it noted at the time, "that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

The impact has been particularly noticeable in the housing market -- which isn't coincidental, given that one of the Fed's objectives was to "support the mortgage market." At one point, the 30-year fixed rate mortgage even dipped below 3.4%, less than half of its long-term average, leading to a dramatic improvement in existing-home sales. In July, the number of previously owned homes that sold was up by 17.2% on a year-over-year basis.

But the tenor of this conversation changed in May after the Fed intimated that it could soon begin to taper its support for the economy. As Ben Bernanke noted in a question-and-answer session with the Joint Economic Committee on May 22, "In the next few meetings, we could take a step down in our pace of purchase."

Since then, virtually no economic release has been perceived but through the lenses of the central bank. "For the past several months, the stock market has been afflicted with a degree of schizophrenia," observed Tomi Kilgore of The Wall Street Journal on Friday. "On some days, weak news on the economy is good for stocks. On other days, it is strong readings on the economy that give stocks a boost."

With this in mind, while it's tempting to predict what will happen to stocks when the Fed does pull the trigger on a taper, doing so is fraught with peril. That said, there are two conclusions that seem safe to make.

First, long-term interest rates will head higher. In the short run, this will weigh on the balance sheets of banks including Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) , both of which experienced multibillion-dollar write downs on their asset portfolios following the Fed's announcement in May. Over the longer term, however, the resulting expansion in their net interest margins should more than make up the difference.

Second, this will put further downward pressure on the housing market. Applications to refinance mortgages have fallen by 70% since the beginning of May. This development has led Wells Fargo (NYSE: WFC  ) , the nation's largest mortgage originator, to predict that its home-loan volume will drop to roughly $80 billion in the current quarter, following seven straight quarters of $100 billion-plus in originations.

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  • Report this Comment On September 14, 2013, at 4:29 PM, shineridge wrote:

    Fraud Street has been pumped up by nothing but Fed "funny money", QE. These "gains" have ZERO to do with any economic improvements. Its all total BS !!!!! Will this absolute FRAUD continue next week ?? I don't know why it wouldn't. The SEC is totally CROOKED, so who's gonna put a stop to this Wall Street CRIMINAL manipulation ???

  • Report this Comment On September 14, 2013, at 6:08 PM, captaintodzilla wrote:

    Doing the same thing over and over is insane. Fix America First. Prioritize , a good example is the best teacher. Recycle America. Create Accountability. Build a new Society before retiring the old decrepit one we have now. Build a new Government before retiring the old decrepit one we have now. Build a new Economy before retiring the old decrepit one we have now. Build a new Educational System before retiring the old decrepit one we have now. Build a new Judicial System before retiring the old decrepit one we have now. build new bridges and a new electrical grid ,prioritize people family and children ......turn things around......provide jobs completing the above task.....take the elites jobs and money they have done it to the working class. build a good foundation then rebuild. reinstate common sense. create accountability. and most of all treat our cancers greed , ignorance and self-entitlement. exile our prisoners and bring back labor camps so our prisoners make us money or at least don't cost us any. secure our borders . invest in our children and education more than politics. I would use morals and common sense good leadership and with gods help I would do it with the strength of the people of the USA. I would arrest thief's and thugs not granny's smoking weed.(meaning prioritize) there are so many simple solutions to our problems but so many master debaters. GREED IGNORANCE AND SELF-ENTITLEMENT ARE THE CANCERS KILLING OUR SOCIETY all the other #$%$ slewn by the media and politicians and churches are the things they use to keep your attention elsewhere like a magicians slight of hand while you focus on their shenanigans your children and your children's children are being exploited for the 1%'s benefit because our society works well for them and they can afford to keep it that way. if they want change FIX AMERICA FIRST. its simple to do for the rich. get a Honest President to declare ww3 so they cant get rid of him before his changes take hold. go to war against GREED , IGNORANCE, SELF-ENTITLEMENT, AND POLITICAL CORRECTNESS send our prisoners off to countries were at war with not our children. use our military as a border. change the charity margins so 70% goes to the charity and 30% go to the fundraisers (opposite of how it is now) invest in our children more than our prisoners. make all public office wages same as minimum wage. cap profit margins in America I don't like paying for the mistakes of others. gas prices went up after the bp oil spill because they wanted to recover their losses. our society runs the way it does because it is designed that way for the rich by the rich. their are many common sense simple ways to change things to make a better world to live in. legalize marijuana god made it man banned it, the rich cotton farmers were afraid of the hemp industry would make them poor. legalize prostitution maybe less children will get abducted. until we can prioritize correctly , have accountability , and worry about the American instead of the American dollar things will remain perverted. Anyone can find fault -- it's not a sign of anything other than moderate brain activity. It's much harder to offer creative criticism that actually improves the situation for everyone involved UNITED we stand divided we fall...there is only one race the HUMAN RACE all the divisions of political parties and skin color have demoralized this country into a sewage plant of lying stealing ignorant greedy self-entitled hypocritical idiots the government has had too much money power and time with too little results actions speak louder than words. vote Todd Higgins for president I would use common sense and high morals.

  • Report this Comment On September 15, 2013, at 3:37 AM, Polyman777 wrote:

    well thought out , there is less than 60% chance of the market " soaring " next week, but will be a fun bubble if it does IMVHO. I'll sell 90% of my portfolio and final retire as I approach 80

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