Market Perspectives (November 2010)

by Jim Baird on November 16, 2010

Executive Summary

  • Following September’s lead, equities posted solid gains in October pricing in a changing political landscape and further Fed easing.   
  • High-quality bonds provided limited returns for the month.  TIPS rallied on the Fed’s inflation-targeting activities, and junk bonds rallied as investors sought out higher yields.
  • The pace of economic growth improved fractionally but remained sluggish for the third quarter.  Deflation concerns persisted, and unemployment held relatively steady at uncomfortably high levels. 
  • The Fed pulled the trigger on QE2 and announced plans to inject further liquidity to stimulate growth and spur inflation higher from current levels.   

“The Good, the Bad, and the Ugly”

Much ado has been made recently surrounding two potentially impactful events – the midterm elections and the November Federal Open Market Committee (FOMC) meeting.  First off, the election, where the focus of campaigns was not on the traditional nuances between Democrats and Republicans, but instead around “solutions” for the battered economy.  On November 2, frustrated and discouraged voters took to the polls with the result being the greatest party turnover in over 70 years.  The result is a divided Congress, as the GOP reassumed the majority in the House of Representatives, while the Democrats hung on to a narrow advantage in the Senate.  Secondly, and likely more impactful, the FOMC formally announced the initiation of a second round of quantitative easing (dubbed QE2 by the press), following its November 3 meeting.  In light of these notable events, we would like to explore the potential benefits (good), risks (bad), and unintended consequences (ugly) which may follow. 

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