The printing press is either the greatest blessing or the greatest curse of modern times, sometimes one forgets which it is. --E. F. Schumacher
The market has been so preoccupied with the "fiscal cliff" issue that it hasn't paid much attention to other primary market forces. For much of the last two years, the main factors impacting the market have been the Federal Reserve and its quantitative-easing programs and the European sovereign debt issue. Corporate earnings, unemployment, economic growth and the overall health of the economy have also been factors; however, above all else, the primary determining factor of market direction has been the actions of the Fed.
The Federal Open Market Committee is set to issue its interest-rate decision and policy statement Tuesday at 12:30 p.m. EST, to be followed by updated forecasts at 2 p.m. and a press conference from Fed Chairman Ben Bernanke at 2:15 p.m.
No one is expecting anything too dramatic, but there should be some talk about the fiscal cliff issue, stressing how important it is to avoid that problem. It is generally expected that the current QE program, known as Operation Twist, will be extended beyond the end of the year.
Probably the most important issue will be discussion of expanding QE3 further by buying more mortgage bonds. The market always likes the additional injections of liquidity, and it will probably react in a favorable manner on any decisions to keep the printing presses running. One of these days, the market may actually begin to worry about inflation, but it's unlikely to be today.
If you have paid attention to the market at all over the last few years, probably the main lesson you have learned is, "Don't fight the Fed." Nothing has done more to drive this market higher than our central bank. It has been downright stunning, at times, how the market has gone straight up when there is QE to drive it.
QE3 has not had the same market-driving capacity as the prior rounds of Fed-created liquidity. It has been lost in the shuffle as the U.S. has dealt with the election, the fiscal cliff and other issues -- but the Fed will likely highlight it today, and I expect upbeat market action as a result.
Frankly, it will be refreshing for the market to finally focus on something other than the fiscal cliff. While the market action has had a positive bias of late, it has been pinned down by this very tiresome issue, and this has kept many things contained. With the "cliff" debate likely to continue for a few more weeks, it will be difficult to make any big commitments.
Once again, it's a short-term traders' market, and I'm giving the bulls the edge, as the Fed is likely to produce some positive feelings once again. We're seeing another flat open in the futures, but there is some strength in the underlying action.