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With markets at a crossroads, Fed Chairman Ben Bernankewill give his second post-FOMC meeting press conference at 2:15 p.m. Eastern Time on Wednesday. Bernanke has moved the markets both ways in the recent past, causing one of the steepest market climbs in recent memory after his famed Jackson Hole speech last August, and, more recently, sending the S&P 500 down 6% after his first FOMC press conference. With stakes higher than ever, Brian Sozzi of Wall Street Strategies is betting on the market rallying “into and during” Bernanke’s press conference.
“Since the first post FOMC decision press conference held by Chairman Bernanke on April 27, the S&P 500 has given back almost 6%,” says Sozzi, adding that sentiment indicators remain bearish. The so-called “Bernanke Rout” in stocks was caused by a variety of factors including a “surprising” reduction of growth projections from FOMC participants, “cold water tossed on the pace of the economic recovery through the consistent use of the word ‘moderate’ by Bernanke,” and the reassurance that QE2 would finish on schedule.
Markets have suffered pullbacks across asset classes since Bernanke’s last FOMC press conference. A “soft patch,” which Bernanke called transitory in a recent speech, took the steam off equities and a global slowdown helped a fuel a commodity pullback.
“Ironically,” explained Sozzi, “the Fed’s continued adherence to the view of inflation being ‘transitory’ has been correct” as food and energy prices have cooled in great part due to a slowing economy both in the U.S. and even China lowering their growth predictions. Add a resurgence of sovereign debt woes stemming from Europe and the situation in Greece, and it seems like things are only getting worse. (Read Oil, Dollar Fall Amid Greek Crisis And Global Slowdown).
The analyst, though, believes market conditions are ripe for a rally.
Sozzi believes market participants have already priced in the substantial cooling in the economic recovery and possible growth estimate mark downs to come Wednesday. With “stock prices (a favorite of Bernanke as rising prices induce the wealth effect) under pressure and commodities hav[ing] sold off,” Bernanke’s more dovish policy approach could spark a “Jackson Hole Moment Part 2.” (Read S&P 500′s Overreaction To Risk Aversion Won’t Boost The Dollar).
Forced to uphold the Fed’s dual mandate of price stability and full employment, Bernanke will have to balance the risks of acting and not acting in the current environment. Specifically regarding the dual mandate, unemployment has ticked up to 9.1% and it’s all but confirmed that growth projections will be lowered. Fate could be twisted the bearded academic’s hand this time: “there is the possibility that Bernanke has a Jackson Hole Moment: Part 2 and conveys a more dovish policy approach relative to April, basically signaling ever so coyly additional bond purchases.”
Further accommodative policy, via an expansion of the Fed’s balance sheet, would be like adding fuel to the fire, and would create a “wealth effect” starting with stocks. While a few weeks ago it was all but confirmed that it would be politically unviable for Bernanke to engage in further easing, analysts today, like Sozzi, are already expecting it.
source: forbes.com
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