bond investors

Why the Lousy Jobs Report Boosted Wall Street

The stock market surged yesterday after the lousy jobs report. The Dow soared 160 points Friday, while the S&P 500, and Nasdaq also rose.

How can bad news on Main Street (only 113,000 jobs were created in January, on top of a meager 74,000 in December) cause good news on Wall Street?

Because investors assume:

(1) The Fed will now continue to keep interest rates low. Yes, it has announced its intention of tapering off its so-called “quantitative easing” by buying fewer long-term bonds in the months ahead. But it will likely slow down the tapering. Instead of going down to $55 billion a month of bond-buying by April, it will stay at around $60 billion to $70 billion.

(2) The slowdown in the Fed’s tapering will continue to make buying shares of stock a better deal than buying bonds – thereby pushing investors toward the stock market.

(3) Continued low interest rates will also continue to make it profitable for big investors (including corporations) to borrow money to buy back their own shares of stock, thereby pushing up their values. Apple and other companies that used to spend their spare cash and whatever they could borrow on new inventions are now focusing on short-term stock performance.

(4) With the job situation so poor, most workers will be so desperate to keep their jobs, or land one, that they will work for even less. This will keep profits high, make balance sheets look good, fuel higher stock prices.

But what’s bad for Main Street and good for Wall Street in the short term is bad for both in the long term. The American economy is at a crawl. Median household incomes are dropping. The American middle class doesn’t have the purchasing power to keep the economy going. And as companies focus ever more on short-term share prices at the expense of long-term growth, we’re in for years of sluggish performance.

When, if ever, will Wall Street learn?

This Is Janet Yellen’s Biggest Challenge

The Fed is trying to put back with the right hand what it’s taking away with the left. But it might need to use both together if it’s going to speed up the recovery.

Ever since Lehmangeddon, the Fed has been stuck in a brave, old monetary world where even zero interest rates aren’t enough to jumpstart the economy. It’s a world that, outside of Japan, we haven’t seen since the 1930s. And one that the Fed has tried to find a way out of in fits and starts. By late 2012, it had settled on a two-pronged strategy to do so: purchases and promises. The Fed purchased $85 billion of long-term bonds a month with newly-printed money, and promised to keep rates at zero at least until unemployment fell below 6.5 percent or inflation rose above 2.5 percent.

But now these programs are winding down, and we still haven’t gotten the catch-up growth that’s always a day (or 6-12 months) away. The Fed started this return to normalcy last May when Ben Bernanke said that it would soon start reducing—or, in financial lingo, “tapering"—its bond-buying. Investors didn’t like this surprise, but the Fed didn’t like the one it got either. Even though its forward guidance hadn’t changed at all, the taper talk made markets expect the Fed to start raising rates much sooner than before. In other words, markets didn’t distinguish between the Fed’s purchases and promises. That’s because the purchases are what made the promises credible, the Fed putting its money where its mouth was.

So how much are the Fed’s promises worth today? Well, more than you might think, though there are still a few difficulties.

Read more. [Image: Reuters]