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Compare and contrast the tenor of the statement released by the Federal Reserve after the most recent meeting of its’ Open Market Committee (FOMC) this past Tuesday with the prior one released June 23rd as well as comments from John Chambers, the CEO of tech bellwether Cisco Systems, after it reported quarterly earnings this past Wednesday with those from the prior quarter and it becomes evident that there has been a marked slowdown in the pace of economic growth coupled with an acceleration in uncertainty over where the economy is headed.
Consider how Press Release dated June 23rd. The Fed begins “information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually.” Further down within the same release the FOMC states that it “anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.”
Flash forward to the statement released this past Tuesday. This time the Fed begins with “information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” Further down in the statement the Fed notes that due to “low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Finally, to support this objective the Federal Reserve will now “keep constant the Federal Reserve’s holdings of securities at their current levels by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”
Equally cautious but candid comments were echoed by John Chambers on the quarterly conference call centering on their earnings. Chambers observes that “we are seeing a large number of mixed signals in both the market and from our customers’ expectations, and we think the words ‘unusual uncertainty’ are an accurate description of what is occurring. The Federal Reserve’ s comments yesterday that the pace and output of the recovery has slowed in recent months, and that the recovery is likely to be more modest in the near term than had been anticipated just a few months ago, are comments that most of our large customers that I have talked with recently would agree with.”
Compare this with a statement made by Mr. Chambers on May 12th within their prior quarter earnings. “Our financial results were outstanding, achieving record level revenue and earnings per share results. We witnessed a return to strong balanced growth across geographies, products and customer segments that we haven’t seen since before the global economic challenges began.”
This cautionary tone expressed by both the FOMC and Cisco is part of the reason that stocks are having a tough time breaking out of their recent trading range, a range that we believe will be around until the mid-term elections.
THE BOTTOM LINE –If we are right and we are stuck in a trading range and as we mentioned in the past, look to add to your mutual funds down around the “Flash Crash” panic lows of May sixth of around 9,756 on the Dow. Other than that keep some cash on the sidelines and await a better opportunity. We believe this will come before the end of the year and will ultimately close out calendar year 2010 with mid to upper single digit gains in the major indices.