On the Federal Reserve (13 Aug 2009)

The Federal Reserve just concluded its FOMC meeting and said that data “suggest that economic activity is leveling out”. So, they are feeling more positive as well and confident that the worst is over for the US economy. The Fed’s comments led to a wall street rally that has extended to Asian markets today. And even though the Shanghai and Shenzhen stock markets continue to be weak, the rest of Asia has taken their cue from the US instead.

This is expected as US is still going to remain the main export market for Asia for some time to come. Other good news from the Fed includes that they said they would keep interest rates “exceptionally low” for an “extended period”. This means that while they think the worst is over, they are in no hurry to rush to raise interest rates yet and risk the economy tumbling back into recession again. This is good because the US is likely to experience a slow recovery so, it will need all the help it can get.

They also said they would stop their bond buying by October. While all this didn’t bode well for US treasuries and US government bonds in general, it’s a net positive for equity markets as well. The reason being that this bond buying exercise was done to shore up confidence at a time when credit markets were frozen. Now that confidence has largely come back at least to an extent where credit markets were working again, then there was no need to keep on buying back more bonds anymore. So, the fact that they do not see the need to continue to take more such extreme measures also mean that financial and credit markets have stabalised and are back to normal now.

But don’t put too much focus on just the Fed’s comments though. Ultimately, it may only result in a short term rise in markets only. For markets to continue to rally, earnings, and economic growth need to come back. Because these take time, we are likely to continue to see a fair amount of market volatility in the next few weeks and months as the bulls and the bears play tug of war.

I am confident the bulls will win out in the end, because time is on our side. But investors need to be patient and not get sidetracked too easily. There will be days or even weeks when markets go into corrections. At this point in time, such periods are still good entry points rather than cause for alarm. The reported earnings for companies this earnings season are in general surprising many analysts on the upside. And many of these companies will continue to surprise over the next 6 to 12 months.

We often underestimate the ability of people to bounce back from adversity. Just because a person is out of a job doesn’t mean they will roll over and just die. They retrain themselves and find a new job. Life goes on. I believe in this human spirit to never give up. This, together with governments having learnt the lessons of the 1st great depression will ensure that we not only come out of the current recession, but that we forge ahead to new heights as well.