The market remains destabilized which is quantified by the VIX index stubbornly remaining in the 40 vicinity. As long as the VIX remains in the 30-40 range investor should expect to see 2-3% moves both up and down in the market from these levels. I believe that the propensity for violent up moves is as probable as sharp selloffs because we are close to levels in the market where a recession is being priced in with a 50% probability. Today, with commentary coming from Ben Bernanke out of Jackson Hole, and a wide array of expectations on what he will indicate from a monetary policy standpoint I see decent odds that the S&P 500 closes at either 1,100 or 1,200 today. That is how destabilized and volatile markets have become. The range of expectations on Bernanke commentary has ranged from “no changes warranted” in the Fed policy stance (they have already mentioned rates remaining exceptionally low for the next 3 years) to an expectation of a $1T+ announcement for “QE3” (GS economics team).
From a real world standpoint, I don’t think there is too much additional stimulus that the Fed can do which will ultimately matter. Interest rates are as low as they can be, and the Fed is appropriately accommodative. QE3 is no silver bullet, and there are a set of unique risks in embracing this approach thrice. For one, gasoline has been about $3.60 (on a national basis) for most of the summer. Last summer, when QE2 was announced, gasoline was at $2.60. $4.00 seems to be a speed-bump for the consumer portion of the US economy and would be a major risk to growth if prices were sent above $4.00. Also food inflation is higher than a year ago. The pro to a QE3 announcement would only come from a potential positive shock to financial markets (stocks, high yield credit) which would be likely to generate short covering and be temporary. I will continue to focus on whether we are in, or not in, a recession. With the market at 1,100, a recession starts to get priced in at a very high percentage. With the market above 1,200 it starts to get priced in with a much lower percentage. I’ll be focused on reading the economic and corporate indicators for signs of recession stress. Please note that CJF focuses on both economics and investing. Much of the content from a company and stock perspective has an investing angle but much of the corporate data that gets scrutinized is used to assess the economy as well. It’s time to pay particularly close attention to higher frequency economic data from August as well as corporate updates on how business is trending through this challenging month.