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Posted by on Oct 10, 2014 in Laif Meidell

S&P erases Wednesday’s gains

S&P erases Wednesday’s gains

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

During the past couple of years, investors have grown accustomed to central bankers calming their fears, just as economic reports appeared to slip or the geopolitical landscape seemed dire. Back in mid-2012, as the economies in the U.S. and Europe were worsening, then Fed Chairman Ben Bernanke and European Central Bank President Mario Draghi delivered a verbal one-two punch within weeks of each other, promising to do whatever it takes to steer the economy in the right direction. Of course, investors cheered and the world was right again.

On Wednesday, the Standard and Poor’s rallied an impressive 1.75 percent following the release of the September Federal Open Market Committee minutes, which analysts interpreted as dovish. It was an impressive rally and had many investors convinced that the market was on its way to new highs, and for 24 hours, the world was right again. However, on Thursday following Draghi’s comments, the S&P 500 declined 2.07 percent, erasing Wednesday’s gains and closing at a new low for the month. (Geek’s note: The last time the S&P 500 was up more than 1.5 percent one day and down more than 1.5 percent, the following day was in August 2011, when Europe’s financial concerns were in full bloom, and the U.S. credit rating was downgraded by Standard and Poor’s from AAA to AA+.)

What went wrong? Draghi said all the right things. He assured investors that the ECB will boost inflations from its ultra-low levels, and that it will provide more stimulus if needed. He appeared to indicate that even after the steps taken in June and September of this year, the ECB is still in stimulus mode. However, Draghi went on to suggest that easy-money policies would have little effect if fiscal policies and structural economic changes, such as cutting taxes or raising public investment spending, aren’t made by European political leaders, specifically Germany.

Investors might have been hoping for another one-two punch from Draghi that included more stimulus dollars, but instead received a cold bucket of reality water. Heaven forbid Fed Chairman Janet Yellen ever suggest the solution to our economic problems lies within the leadership in Washington, D.C. coming together with a plan.

High-quality bonds continued to lead this week as investors sought the safety of U.S. government bonds. For the week the top performing bond index was the Barclay’s U.S. 20+ year Treasury Bond index gaining 1.42 percent, followed by the Barclay’s U.S. 7-10 year Treasury Bond index higher by 0.9 percent over the same period.

This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.

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