So here’s some investing knowledge. In 2009, Ben Bernanke, Chairman of the US Federal Reserve embarked on an unprecedented program that to date has provide $3 trillion in stimulus to the US economy. The Fed did this by buying treasury securities and mortgage backed securities. The money was credited to bank balance sheets, providing them with boat- loads of cash to use, supposedly for lending to stimulate growth. However, this did not happen. The banks kept most of the money and speculated in the markets driving the Dow Jones Industrial Average to new all time highs. If the banks had been forced to lend the money we would have a much different economy.
When a bank makes a loan you have the “multiplier” effect of that money creating more buying and moving the economy along much quicker. For example, when a bank makes a loan for say $500,000, that money is deposited in the business owner’s checking account. In effect the bank has created a sum of $500,000 that the business owner can spend any way he/she wants. Had the Fed demanded that banks lend out the money our economy would be quite different. While Bernanke’s stimulus did prevent a more catastrophic crash, his biggest flaw will be that he did not demand that the banks lend out almost all the money. The banks cried out that there was no demand for loans. There was no demand because they tightened up the requirements so much that only big corporations could borrow. The money never got to the small business owners who needed it the most.
As a consequence unemployment has remained stubbornly high. Housing has moved up a bit but not to pre crash levels. All of this is history. Now we must look forward to the remainder of 2013.
We have two key dates marked on the calendar. The first is June 19, 2013. This is when Bernanke announced that he planned to “taper” the bond and mortgage backed securities buying this year and end the program probably next year. That drove interest rates higher and bond prices lower. Long- term rates for 30- year mortgages spiked from 3.59% to 4.73%. The thought of tapering caused uncertainty and the economy went into a “wait and see” mode. Housing which had a good first half, slowed in August. Unemployment dipped just a tiny bit but job creation did not meet expectations.
With tapering a new reality the markets stopped dead following an unprecedented 5- year run to new highs. On September 18, 2013, Bernanke stunned Wall Street by announcing that he was “NOT” tapering at this time. Within minutes that markets shot to new all time highs. Now with new money still flowing, the markets have a clear shot from October though year- end.
There is still one issue that needs to be resolved and that is raising the debt ceiling. The Republicans want to de-fund Obamacare. The President has said that he will veto such a measure.
With this power struggle going on in Washington it would be prudent to wait until the matter is settled. Given a favorable outcome for all sides, the rest of the year is looks rosy.
Look to big cap stocks in the Dow Jones Industrial Average and the S & P to do well. You could either pick individual stocks or buy an ETF for the Dow or S & P.