JPMorgan: Forget September Worries; Buy Stocks Now

Monday, 03 Sep 2012 04:48 PM

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September is historically a bearish month for stocks but that won't be the case this year, JPMorgan analysts wrote in a recent note.

The Federal Reserve and the European Central Bank will take steps to stimulate their economies to prevent them from sliding into deflationary downturns, and as a welcome side effect for investors, stock prices will rise in a month they typically fall.

"Go outright long U.S. equities as U.S. has least event risk in September, upside risk on the economy and a more supportive central bank," JPMorgan analysts wrote in a note published after the Federal Reserve's annual symposium in Jackson Hole, Wyoming, where Fed Chairman Ben Bernanke said last Friday the U.S. central bank could not rule out the use of stimulus measures to kick start the economy.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Many analysts expect the Fed to stimulate the economy likely through with a new round of quantitative easing (QE), under which the Fed buys bonds held by banks, pumping the economy full of liquidity to drive down borrowing costs and spur investing.

The Fed has rolled two rounds of quantitative easing (QE1 and QE2) since the financial meltdown in 2008, though tepid jobs reports and weak growth rates, among other indicators, have stoked market talk that a QE3 is on the way.

Past easing measures have pumped $2.3 trillion in fresh liquidity into the economy, sending stocks gaining in the process.

The European Central Bank, meanwhile, is expected to announce plans to buy sovereign Spanish and Italian debt to lower borrowing costs in those markets.

Don't expect central bank intervention to seriously spur economic recovery and growth, as monetary stimulus tools tend to carry diminishing returns though this time around, they will come strong enough to send stock rising.

"The U.S. Federal Reserve is probably closest to having exhausted its armory, but is also seen as the policy maker most willing to do whatever it takes to reverse conditions. Hence, the preference of many investors to hold U.S. equities relative to the rest of the world," JPMorgan analyst wrote, according to Business Insider.

"Bernanke confirmed his commitments again at Jackson Hole, but is making us wait to the next FOMC meeting for details. He will then likely extend rate guidance for another year, with close to even odds of another bout of balance sheet extension," the analyst wrote, referring to the Federal Open Market Committee (FOMC), the Fed body that sets monetary policy.

"Overall, we do not count on any of his actions to directly lift growth, and see it more as a boost to asset prices. Hence, our overall positive stance in U.S. asset prices."

The Federal Reserve will hold its next monetary policy meeting from Sept. 11-12, and expect stock prices to continue their summer rally.

"Central bank policy response in Europe and the U.S. is essential for this rally to continue, in our view. We remain of the view that forthcoming policy response by the ECB and the Fed will be adequate to sustain the equity rally into September."

Bernanke has used the Jackson Hole symposium to telegraph policy moves in the past and this year, he stressed that stimulus tools remains ready for use if the economy doesn't show marked signs of improvement, the labor market particularly.

"The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant," Bernanke said in prepared remarks at his speech.

"Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

Other noted market observers interpret Bernanke's words to mean that if monthly jobs reports don't start showing noted improvements and quickly so, then expect the Fed to announce a third round of quantitative easing very soon.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"The last sentence basically said the Fed will provide additional policy accommodation as needed to promote sustained improvement in labor market conditions. And that's the key," said Bill Gross, founder of Pimco, the world's largest bond fund, according to CNBC.

"What he really wants to do and what the Fed is targeting in terms of QE is a sustained improvement in employment, a lowering of unemployment, and until you see several months, several quarters of, perhaps, 7 percent unemployment rates, then you're going to see QE."

The unemployment rate currently stands at 8.3 percent, according to the July jobs report, the most recent, and has not dipped below 8 percent since the downturn.

The economy added a net 163,000 jobs in July, 64,000 jobs in June and 87,000 in May, according to the Bureau of Labor Statistics.

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