The Dow Jones Industrial Average and the S&P 500® Index recently reached all-time highs.  Yet, a seeming disconnect between the economy and the stock market exists. In this blog we focus on news events that clarify the economic situation and Fed policy and the apparent disconnect with the level of the major stock indexes.  We also mention an item in the President’s budget proposal that is central to this region’s economy.

Fed Open to Expanding QE as It Counters Talk of Tapering.  Faced with a disappointing jobs report for March, showing that just 88,000 jobs were created, and other economic data suggesting a summer slowdown, the Federal Reserve last week affirmed its $85 billion per month bond-buying program (quantitative easing, or QE for short).  In addition,  the Fed went a step further in its statement by saying “it’s ‘prepared to increase or reduce the pace of its purchases’ …a signal that

[its bond purchase program] is a flexible tool for monetary policy that can be adjusted up or down [emphasis added], like interest rates.”  “There is more uncertainty so they probably wanted to correct a single-minded focus on tapering [i.e., reducing the amount of monthly bond purchases].”  “The Fed repeated that bond buying will continue ‘until the outlook for the labor market has improved substantially’…it also left unchanged its statement that it plans to hold its target interest rate near zero for as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.”  This tweaking of policy reinforces the “Whatever It Takes” approach to reviving the economy through monetary policy.

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Not swooning, not soaring.  The April jobs report was better than expected.  Non-farm payroll jobs rose 165,000; the unemployment rate fell from 7.6% to 7.5%, and the labor force participation rate (i.e., those who want to work as a share of the population) remained at 63.3%.  Thus, the unemployment rate dropped for the right reasons—more people working.  Moreover, the poor job reports for the two prior months were revised upwards.  “Combined with last week’s sharp and unexpected decline in first time claims for unemployment benefits, and the stubborn optimism of equity investors, the April jobs report strongly suggests the recovery has not stalled…[but] details of the April employment report offer little hope the economy has accelerated from the recent 2% pace.”

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Disconnect:   Why Stocks and Economy Often Move in Opposite Directions.  The Dow Jones Industrial Average and the S&P 500® Index recently reached all-time highs.  Yet, economic growth proceeds at a tepid pace.  Why are the stock market and economic fundamentals so disconnected?  According to Liz Ann Saunders of Schwab, “the bottom line is that the stock market, as a leading indicator, tends to launch into rallies and/or corrections around economic inflection [turning] points.  By definition, a rally-inducing inflection point occurs when economic growth stops falling and begins to rise.”   Other factors also come into play:  valuation, economic surprises and Federal Reserve policy.

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 The Tennessee Valley Authority:  Damned if you don’t.    Buried in the President’s budget released on April 10th was a suggestion of “the possible divestiture of TVA, in part or as a whole.” “Reducing or eliminating the federal government’s role in programs such as TVA, which have achieved their original objectives and no longer require federal participation, can help put the nation on a sustainable fiscal path.”  The article noted “elected officials in the TVA area are either frosty or outright hostile to Mr. Obama’s proposal.”  In the 1964 election Barry Goldwater proposed selling TVA. Who would believe—ever—that Barry Goldwater’s proposal would be resurrected by his polar opposite in 2013?

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Disclosure – The articles mentioned in Mid Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security.  J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.