There is a lot of negativity in the equity market right now. The Federal Reserve’s new Chairman, Mr. Ben Bernanke, did what just about every other high-powered government official does at the beginning of their time in power–he covered his rear-end.
Recently, Mr. Bernanke delivered a speech where he raised the possibility of more interest rate hikes if inflation persists. Noting that the core inflation rate was at the high end of the Federal Reserve’s target band, the equity markets have been moving lower ever since.
Because every Fed Chairman knows that his or her every word is severely scrutinized, there’s no question in my mind that he threw out the possibility of higher rates to protect himself and the Fed if inflation gets out of control.
Now, here is the good news. Very often these kinds of events can present turning points in the market’s action. The example being: in anticipation of bad news, stock prices will go down. With the bad news out in the marketplace, stock prices will go up.
In essence, this is what I believe will happen in the not-too-distant future. Mr. Bernanke has left the door open for further rate hikes. As nobody can predict the future, this is a prudent course of action if price stability is your primary goal. So, the cat is out of the bag. The bad news is out. Therefore, certainty has returned to the marketplace. Therefore the current downtrend in stock prices must reverse.
This isn’t scientific, only a reflection of past experience in observing stock prices. It won’t be too long before we get a look at second quarter numbers and I really think that corporate earnings will continue to be strong.
So, at the end of the day, the point of this rant is that I think the broader market will turn higher in the near-future. I could be wrong, but this is my best guess right now.