Friday’s jobs report that showed hiring in the US unexpectedly ground to a halt in August is increasing speculation the Federal Reserve will move to stimulate the economy. But will it help stocks?
Fed action – if it happens – is no longer viewed as the elixir for the stock market it once was.
Wall Street tumbled more than two per cent on Friday as investors fretted more about the economic outlook rather than looking ahead to another round of Fed bond buying.
This week, the question of whether the Fed will step up to the plate with another round of quantitative easing will take centre stage with a highly anticipated speech from President Barack Obama. That could make for another volatile week.
This time last year, anticipation of a second round of quantitative easing, or QE2, sparked an almost uninterrupted rally that lifted the S&P 500 around 30 per cent from August to May.
What a difference a year makes. Confidence in policy makers is falling away as the economy languishes, the United States grapples with the loss of its top-notch credit rating, and the European Union seems to be coming undone at the seams.
Wall Street sees an 80 per cent chance the Federal Reserve will intervene in the bond market to lower long-term interest rates.
But Friday’s action in the stock market signalled that equity investors do not see that prospect as silver bullet for their woes. The broad-based S&P 500 index fell 2.5 per cent on the day.