Traders are saying the scariest moment of the second quarter will be on April 27, when Federal Reserve Chairman Ben Bernanke will hold the first ever press briefing following a monetary policy decision by the central bank.
This change in the Fed’s communication with the markets alone is enough to give investors the jitters, but the nervousness is compounded by the anticipation of a signal by the Fed chief as to whether the quantitative easing that has fueled this bull market will continue past its stated end date in June.
“I think Bernanke wants to continue to ‘QE3,’ but the rest of the Fed does not, and if he has to admit that on the air, it could be the turn,” said Steve Cortes, founder of research firm Veracruz LLC.
Stocks flirted with a new bull market high on Thursday as the first quarter came to a close. Two weeks ago U.S. stocks looked like they were headed for a correction as turmoil in the Middle East, the earthquake in Japan and weak consumer and employment data in the U.S. combined to bring the bears out in force.
But just like every time during this teflon two-year bull market, the bearishness could not even result in a normal 10-percent correction. After a seven-percent pullback in the S&P 500, the market is back near its highs.
The momentum and durability of this bull market can be traced back to a single event that took place at the end of last August, investors said, when Bernanke first signaled that a second round of quantitative easing was likely coming.
“I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions,” said Bernanke, in a speech at the Fed’s Economic Symposium in Jackson Hole, Wyoming on Aug. 27. In November, the central bank would formally announce plans to purchase $600 billion in long-term Treasury securities by the end of June 2011.
The S&P 500 is up more than 25 percent since that Jackson Hole speech as the second round of easy money inflated asset prices and pushed investors to take more risk. The fate of this program, and the possibility of a third such asset-purchase plan, could be signaled at the April 27 briefing.
“I would anticipate a giant ramp up in volatility ahead of this press conference,” said Jon Najarian, co-founder of TradeMonster.com. “Traders react to one word removed from a paragraph in the policy statement and now he’s going to hold a press conference?”
To be sure, while just about every trader will acknowledge the added liquidity has played a hand in the bull market, many still see it continuing on when it ends. They cite the improvement in company earnings and the money still on the sidelines following the credit crisis, among other things.
“The negative concern d’jour is that when ‘QE2’ ends in June, the market will trade sharply lower and the bears will be proven correct,” said Laszlo Birinyi of Birinyi Associates, in his monthly newsletter to clients. “Perhaps, we don’t know and quite frankly do not think that they do either. Bears, however, attribute the entire rally to the Fed’s buying, but we think that is an overstatement.”
One fact that points to this rally being primarily Bernanke-based is the amazing breadth of the gains. In the last 12 months, just 50 stocks in the S&P 500 are down more than 5 percent. It is a bull that is essentially lifting all boats, on low volume to boot.
“The end of ‘QE2’ could induce a 10 to 15 percent correction,” said Peter Boockvar, equity strategist at Miller Tabak. Since the second leg of this bull market began so closely to Bernanke’s Jackson Hole speech, “to think that the program will end and the market won’t anticipate and respond lower, I believe, is wishful thinking.”