Cliff Diving – Day 7

Bernanke speaks.  Stocks tank.  Buyers step in.  Market closes unched.

Stocks got spanked during Chairman Bernanke’s speech to the New York Economic Club but managed to claw back losses,  to close, essentially, unchanged.   Bonds and gold got whacked on possible perceptions the  Chairman was hinting that monetary policy may change sooner than expected due to the Fed’s downgrading of potential growth,

The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years…the fact that unemployment has declined in recent years despite economic growth at about 2 percent suggests that the growth rate of potential output must have recently been lower than the roughly 2-1/2 percent rate that appeared to be in place before the crisis.

A lower growth potential would equate to less stimulus induced aggregate demand to maintain price stability.

Nevertheless, the market’s resilience was impressive on a relatively low volume day.  The S&P500 traded down through its 200-day moving average at 1382.7 to around 1377 and was able to bounce 1o points to close at  1387.81, up about a point on the day.  Financials and consumer discretionary outperformed.  Apple, after yesterday’s 7 plus percent move, gave back only about 1 percent.  Not bad.

What would a real fiscal cliff panic look like?

Stocks down hard;  Russell 2000 down harder;  consumer discretionary down hard;  gold up;  dollar down;  VIX spiking;  and defense stocks in the tank.

Bonds?   Tough to extract a clear signal with the Fed’s financial repression, but,  initially,  the cowboys would most likely be in buying on recession fears and increased worries about going over the cliff.

(click here if table and video is not observable)

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