News Analysis date published New: 
Tuesday, August 28, 2012 - 07:30
New Date created: 
Tuesday, August 28, 2012 - 09:37
New Date last updated: 
Tuesday, August 28, 2012 - 07:30

The 4 Things that Keep Ben Bernanke Awake at Night

Tuesday, August 28, 2012 - 7:30am

Circle your calendar for Sept. 13. That afternoon, Federal Reserve Chairman Ben Bernanke will decide whether the economy (and by extension the stock market) will need a major boost with another round of monetary easing measures. If he moves forward and decides to give more juice to the economy, then the market could extend its recent rally. But if he presses the "no action" button, investors may just head for the exits.

We can actually get a pretty good sense of how the Fed will decide in advance. That's because a slew of economic data will hit the newswires in coming weeks and Bernanke will be watching along with the rest of us. Many investors are actually hoping the economic data look fairly weak, as that boosts the chances of the Fed taking action. Bernanke & Co. surely hope it doesn't come to that. In fact, I'd wager they might lose a fair amount of sleep the night before these numbers are announced.

If you want to handicap the Fed's eventual decision, then here are four important economic readings the Fed will be watching. You should be tracking these reports in the coming weeks, too...

Reading # 1: Tuesday, Aug. 28
The Fed wants to know whether consumers are in the mood to spend. The prior month's consumer confidence reading was a tepid 65.9, though that was still higher than consensus forecasts. Economists predict the figure will rise slightly to 67.0, but if recent comments from retailers are any guide, then even that number may be exceeded. If so, then investors may conclude the Fed won't act in mid-September.

Reading # 2: Tuesday, Aug. 29
The pending home sales reading actually dropped, on a seasonally-adjusted basis, from 100.7 in June to 99.3 in July. Here again, recent signs point to a bit of strength. Consensus forecasts call for this gauge to rise to 103, and any number above that might give the Fed a reason to hold off a bit longer before deciding whether to take action.

Reading # 3: Friday, Aug. 31
Economists are expecting a Chicago Purchasing Manager's Index (PMI) reading of 55.0. Any reading above 50 signals economic expansion. Even though this and the consumer confidence reading have a positive-leaning bias in the forecast, the Chicago PMI reading may in fact underwhelm. Factors ranging from the nationwide drought to a slowdown in China and Europe to early concerns about the effect of the "Fiscal Cliff" may conspire to lead to a weaker-than-expected PMI reading. And paradoxically, that would be good news for those hoping for a Fed boost.

On this same day, Bernanke will be giving a pubic presentation at Jackson Hole, Wyo. Many will be tuned in to see if there are any hints about forthcoming Fed action, though Bernanke is likely to be sufficiently obtuse to frustrate the tealeaf readers.

Reading # 4: Friday, Sept. 7
Is the job market healing? The Magic 8-Ball says "Reply Hazy, Try Again." Frankly, the employment picture can't seem to build a sustained head of steam, nor does it want to fall out of bed either.

U.S. Employment Situation

Economists are currently expecting that 120,000 jobs were created in August, though that figure will be fine-tuned by a pair of weekly jobless claims releases before the actual numbers are released. Jobless claims figures haven't been very helpful recently, delivering weekly results that have been fair to middling.

Suffice it to say, if the August jobs number is above 200,000, then investors will quickly conclude that the Fed wouldn't dare give help to an economy that is hardly sickly.

Risks to Consider: Even as investors watch the data and try to predict how the Fed will act, there are many other events that could conspire to dampen this current rally. This is no time for complacency, even as the last week of August is typically filled with light trading volumes.

Action to Take --> This summer's impressive rally is due in part to expectations that the Fed will take action and order another round of Quantitative Easing. But beware. Such a move has given a short-term boost to stocks, but the euphoria may quickly fade. If we do indeed see a powerful Fed-induced rally, then it may be wise to harvest profits. Conversely, if some combination of these readings comes in reasonably healthy, then don't be surprised to see the market actually fall in the ensuing weeks, as investors conclude that another round of "easy money" isn't on the way.

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David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.