Experts Talk Bernanke, Emerging Markets, Stocks

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Dec. 7. Michael Wallace, Action Economics Federal Reserve Chairman Ben Bernanke maintained a dovish tone in his Dec.7 speech at the Economic Club of Washington, in contrast to the hopeful signs from [the November] employment report. The Fed chief noted the economy still faces "significant headwinds" in his first public comments since Friday's data. He said although the economy and financial markets have moved back from the brink and signs of the recovery are widespread, credit is still tight and the labor market remains weak. We should see modest growth next year, but the unemployment rate is likely to remain above where the Fed would like it. Inflation may even move lower from here. There's no evidence the Federal Open Market Committee is planning to hike rates anytime soon. All in all, the still cautious tone was the risk we cited and should give stocks further support and help push bond yields a little lower at the expense of the dollar. Jan Hatzius, Goldman Sachs Concern about the employment situation is the key reason why we expect the Fed to keep the funds rate at its current near-0% level in 2010 and, more likely than not, also in 2011. The story is really quite simple. Depending on how one counts discouraged workers, there are 7 million to 10 million people who would have a job in a normal labor market but don't have one now. This is first and foremost due to a lack of aggregate demand. In such an environment, it just doesn't make sense to erect further hurdles to a demand recovery by raising interest rates. At least in principle, we should be doing a lot more to boost demand—i.e., increase the amount of fiscal and monetary stimulus. But a continued low funds rate seems like the bare minimum, at least until a sizable share of the jobless has been put back to work. Win Thin, Brown Brothers Harriman Recent trade data from emerging markets suggest GDP growth rates for most countries are poised to surge in the fourth quarter and into 2010. Taiwan exports jumped 29% year-over-year in November, the first such gain since August 2009. Base effects are going to remain favorable well into 2010, so more eye-popping numbers are in the pipeline for Taiwan and most of the other emerging market exporters. In Latin America, Chile reported export growth of 26% year-over-year in November, the second such gain in the last three months. By most indications, 2010 should be a pretty good year for global growth, so flows should keep EM currencies bid over the next several quarters. Another factor to consider is that with the sharply improving data, markets may start pricing in earlier than expected rate hikes by EM central banks, another supportive factor for EM currencies. Mary Ann Bartels, Bank of America Merrill Lynch The [stock] market has been locked between two key levels that should define the next leg of the market move. The bulls will win if the S&P 500 closes above 1120, and the bears win if the S&P closes below 1084. As we move into this trading week, data are mixed. Short-term market indicators generally have neutral readings. Volume is showing signs of possibly improving, with the Volume Intensity Model (VIM) moving neutral, but this was more by sellers moving to the sidelines. Buyers are still not present. But this needs to be watched. The U.S. Dollar index had a sharp rally late last week, and our work has been pointing to a bottom in the dollar. A stronger dollar should be negative for stocks as the correlation between stocks and the dollar has been negative. The U.S. dollar is challenging the 50-day moving average at 75.68. If this breakout holds, the next key level for the dollar is 76.82. So the tug of war between bulls and bears is still on, and it will be won on a move to break key levels on the S&P of 1120 or 1084. Sam Stovall, Standard & Poor's In Barron's over the weekend, several stories had to do with searching for yield. If an investor wants to embrace the higher-yielding investment theme, however—whether due to market jitters or just because they wish to add some payout to their portfolio—we suggest they don't look to yields exclusively. A non-REIT or limited partnership that yields substantially more than the overall market should be a cause for skepticism, in our opinion. There may be negative implications behind the high yield, among them a potential cut in the dividend itself.

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