Wednesday, July 24, 2013

Fed Misery Rebalancing May Bolster U.S. Stocks

The Federal Reserve’s efforts to bring down unemployment and push up inflation may sustain the
bull market in equities, according to Edward Yardeni, Yardeni Research Inc.’s president and chief investment strategist.
A decline in what’s known as the misery index has accompanied a 151 percent surge in
the Standard & Poor 500’s Index since March 2009. Yardeni made a similar comparison in a blog posting yesterday.

     To calculate the misery indicator, he added the jobless rate to year-to-year percentage changes in a price gauge linked to consumer spending. The index fell to 8.7 percent in May, the latest month available, from a 25-year high of 11.8 percent in March 2010.

     “Odds are it will remain around 8.5 percent through the end of next year,” the New York-based strategist wrote in his posting. “If so, then it suggests the current bull market may last at least until then, if not longer.”

     Stocks usually rose when the misery index held steady or dropped since the 1960s, Yardeni wrote. The gauge appears in the chart’s top panel. The S&P 500 is on a log scale, magnifying its
moves over time, in the bottom panel.

     Fed policy would rebalance the misery gauge, he wrote. Members have pledged to keep their target interest rate close to zero “at least as long” as unemployment is more than 6.5 percent, and their annual goal for inflation is 2 percent. The figures add up to an 8.5 percent index reading.

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