Yellen to the Rescue

04/18/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak thinks the market's reaction to the recent speech by Fed chair Janet Yellen is a sign that the market again believes that the Fed's policy is bullish for stocks.

On April 16, it was Janet Yellen to the rescue! For as far back as I can remember, oh, 2013 or so, the market has been able to rally on the assumption that it always could count on the fed. Well, that assumption still seems to be true that, after a retreat on the NASDAQ of almost 10%, the fed seems to have decided that it needs to be more transparent about its intentions, and so, on the 16th, Yellen came out and said, “Hey, you guys really don’t need to worry about when we’re going to start raising rates. All that confusion, put it aside. We’re not going to raise rates until, well, until we raise rates, a long, long time from now. Don’t worry about it. Your great-grandchildren will still be at zero.”

What Yellen basically said is, forget about worrying about when unemployment gets down to 6.5 and that triggering anything. Forget about worrying about inflation. The real concern here is, the fed wants to see full employment. Full employment is a kind of—well, vague economic concept. It’s not at all clear what the full employment rate in any economy is. It’s all kinds of assumptions. The calculation right now is that the full unemployment rate—this is the full employment rate. This is when the economy is running at full speed. The unemployment rate would be only 5.5, only I’d put in quotations marks, air quotes, because only—5.5 doesn’t feel like only if you’re one of the 5.5% out of work. I remember growing up and thinking that 3.5%, 3%, 4% was a large number of people out of work. Anyway, right now, the calculation says that because of changes in the US economy, its 5.5. Well, you can see what just happened on the 16th. Instead of worrying about, well, we’re getting close to 6.5 unemployment and that might trigger the fed to start raising rates. Suddenly, we’ve moved it down to 5.5, so we’ve got a whole 'nother 100 basis points of drop in the unemployment rate before we even get back to the same situation, so is it any wonder that on April 16, the NASDAQ, which had been the worst hit of all the major indexes, was actually up 1.3% and the S&P climbed about 1%. Now, if the market weren’t quite as wacko as it is, I’d say simply, don’t fight the fed if the fed is going out and saying, “Hey we’ve got another 100 basis points of unemployment rate decline before we need to worry about moving up from zero,” I would say, basically, the market is going to rally again.

I’d like to see a couple of more days go by and make sure that today is not simply a one-day bounce, but I think that, even though nothing has really changed, we’ve still got bad news out of China. We’ve still got slow US growth. We’ve still got an earning season that doesn’t look like it’s going to produce anything. I think what we’re seeing here is—my sense is, a change in base psychology that we’ve got the fed saying another 100 basis point decline in unemployment. We’ve got the Bank of Japan saying, “Hey don’t worry about it.” We see the economy looking a little better, but we’re still worried about the rise in the national sales tax, but we’re going to make sure that we do whatever it takes in echo of Mario Draghi in Europe, so, I think, what you’re seeing is a change in psychology back to faith that the Central Banks are going to bail them out. The big one, of course, is the Bank of China—Peoples Bank of China—where, basically, you had negative news on the Chinese economy, but it seems like, even there, the psychology is changing and people are saying, “Oh that brings us—the bad news brings us closer to the day that Peoples Bank will actually stimulate,” so, that’s the sense I have. I’d like to wait a day or two into this, but for the week ahead, I look to see whether the markets are indeed going to go with the fed.

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