Blog : The Lessening of Uncertainty

by Ed Zwirn on December 20th, 2013

In my Labor Day weekend penny stock blog, I said farewell to a summer fraught with uncertainties. Of course, there was the already a drumbeat of concern over a possible Fed tapering, and the stock market had been taking a beating all summer, with the Dow Jones Industrial Average sitting at 14,810.31 on Labor Day, but the malaise had reached to much more widespread and frightening levels.

For one thing, as of Aug. 30, when I wrote the blog, there had been widespread confusion over whether or not the U.S. would launch a military strike against Syria. We had been told to expect military action within 24 hours at one point. The subsequent rejection by the British Parliament of any involvement in another "coalition of the willing" derailed the war threat. Since then, diplomatic initiatives with both Syria and Iran seem to have taken Middle East wars off of the short-term U.S. agenda, especially given the obvious public war weariness we are seeing on a global level.

The uncertainty over Syria was soon superseded by another round of political crisis which saw huge chunks of the government shut down in October, in a perverse runup to the federal debt extension deadline. It was one thing to furlough federal workers for a few weeks (while promising to pay them retroactively for doing nothing), but a default on U.S. Treasury obligations would have risked fundamental financial market upheaval. Since then, the quick fix deal that went down in mid-October actually bought time for Congress, which they have actually utilized, with a bipartisan budget document that takes a January government shutdown off the table, leaving no room for major crisis until February, when the next debt ceiling breach is expected. Even accepting the doubtful proposition that conservatives would mount a credible effort to try and block the debt ceiling extension at that time, this still buys us some critical breathing time between now and the next government showdown.

It is in this context that I look at the relative market euphoria that followed Wednesday's U.S. Federal Reserve policy announcement. In cutting back its $85 billion monthly bond buying stimulus by $10 billion starting in January, the Fed did what the market had expected would happen anyhow sometime between now and early next year. The Fed also did financial markets a service by eliminating one of the last remaining market uncertainties still left over from Labor Day.

"Markets would have to be highly dysfunctional if they had yet to price in a tapering of the Fed's bond buying program," Moody's analyst John Lonski wrote in his market wrap following the surge in stocks that followed Wednesday's Fed announcement.

The rally in the day and a half to follow the Fed announcement has been pronounced, with the DJIA rising 1.9%, a gain of over 300 points. Taking a longer view, the progress of the market since Labor Day and all its worries has been notable, with the Dow at a record 16,179.08 up about 9.2% as external threats to a fragile economic recovery have receded, at least for the time being. 

This period has also been particularly profitable for the broader classes of investor, including investors in penny stocks and other small-cap shares, with the NASDAQ up a full 13% and penny stocks, using the small-cap Russell 2000 index as an indicator, up 11.3%.

In addition to this being obvious good news for penny stock investors, it is generally recognized that a broader market rally has greater staying power than one led by a few blue chip headliners. The outperformance of smaller stocks in relation to the market as a whole is considered a sign of risk appetite and is therefore a bullish indicator.

Admittedly, not all the indicators going forward are going to be bullish. Employment and real estate numbers are improving but remain vulnerable. Persistent deflation will have to be dealt with before the recovery has legs beyond the training wheels provided by Fed stimulus. And of course, we don't really know where the next fraudulent asset crisis is sitting and when it may implode. In short, a host of scary things can happen.

Still, I can't help but think that humanity, or at least our chunk of it here in the U.S., may be becoming a tad more rational, or at least practical. Some of the deals that have been patched together both internationally and domestically may have their flaws, but by taking war and/or debt default off the table, at least for a while, they have at least eliminated the uncertainty that has was bedeviling not only the market, but the U.S. public more generally, just a few short months ago. By making its moderate year-end policy announcement, the Fed has driven the last nail into uncertainty, giving market players a free hand to party into January.