Last Week in Brief: October 17

October 17, 2014

Markets can turn fearful in a hurry. Last week? Looked like the SS Nightmare.
The week realized massive spikes in volatility as bulls and bears battled across the equity landscape. In fact, Monday's decline ended the S&P 500's streak of closes above its 200-day moving average at 477 consecutive trading days. The fifth longest streak in the indexes history. And the longest since 1998.
The two main volatility drivers? Anxiousness over the potential end of the Fed's QE3 bond buying program in two weeks. And Ebola's arrival within the continental United States. Both issues, for investment purposes, remain unresolved.

Remember, we haven't experienced a 10-percent correction in over two years. As of Friday, the S&P 500 was only 6.5 percent off its September highs. Yet the Fed was already hinting at stepping in with additional easing, if necessary. Talk about moral hazard.
When the Fed terminated QE1, QE2 and Operation Twist in 2010, 2011 and 2012, respectively, the market dropped. Then the Fed started right back up again. Well, we've not yet concluded QE3 and the Fed has already alluded to another round of easing.
When does it end? The Fed's monetary base has already swelled from $800 billion prior to the recession to more than $4 trillion today. Beyond the scope of anything attempted before. We are truly in uncharted territory. Yet, the Fed has induced the economy into a severe stimulus addiction. And Dr. Frankenstein is very nervous about his patient going cold turkey.
Moreover, the job market is tightening. U.S. retail sales have improved. Housing starts jumped. Meaning, the end of QE3 looks justified. While some near-term turbulence would be likely, the moral hazard has got to end at some point.
Weekly Results
Major markets finished lower last week. The DJIA fell 0.99%, the S&P 500 dropped 1.02%, and the Nasdaq declined 0.42%. Small cap stocks rose 2.75%. And the 10-year Treasury bond yield fell 373 basis points to 2.20%. Gold rose $15.45 per ounce, or 0.70%.

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