Markets closed mixed on Wednesday after economic issues gave both bears and bulls food for thought.

Early in the session stocks rallied broadly after a positive durable goods report.  While analysts were expecting a 0.8% decline, the numbers actually came in with a gain of 1.8%.  Now there are many different ways to examine the numbers, ex-transportation the report was up 1.1%, and ex-defense orders grew by 1.4%.  Lower inventories was also an encouraging sign as it means that when the economy turns stronger, there will be an immediate need for new orders instead of companies working through levels of inventory already built up.

The Organization for Economic Co-operation and Development (or OECD) did its best to offset the negative World Bank report which sent stocks spiraling on Monday.  The OECD raised its estimate for global economic growth from 0% to 0.8% growth.  An expectation for the US economy to bottom this year was certainly a contrast to the World Bank’s dour expectation of continued recession for the US and the global economy.

But the FOMC statement at 2:15 threw cold water on the rally as Bernanke and company stated that they are making no change to current policy.  According to the statement released, the FOMC sees the rate of contraction slowing which is relatively small comfort especially when the Fed later stated that they believe the economy will stay weak for a time.  It appears that the target rate for fed funds will remain near zero “for an extended period.”

Probably the most important part of the statement was the Fed’s continued commitment to buying treasuries and mortgage backed securities to add liquidity to the market and keep rates lower.  This is a less traditional policy method which was instituted in December and has been a key avenue for pumping cash into the economy.

While the official statement on inflation showed little concern, some of the governors have begun to express their concern about the long-term danger of loose policy.  Thomas Hoenig, the Kansas City Federal Reserve Bank President has been outspoken regarding the possibility of inflation and the historical tendency to leave monetary policy too loose when coming out of recessions.  We have begun to see rising commodity and fuel prices which are more volatile but certainly could be the precursor to a more widespread inflationary environment.

At the end of the day, the Dow was down 0.28%, the S&P 500 was up 0.65% and the ZachStocks Growth Model actually gained 1.80%.  Strength was relatively broad, but strong moves in our China Gaming positions Netease.com, Inc. (NTES) and Shanda Interactive Entertainment Ltd (SNDA) were of particular help.  Precious metals were higher as inflationary fears began to creep back into investors minds.  It will be interesting to see if the recent pullback in gold and silver will find support and regain its positive trend.  For our part, we are protecting client accounts against inflationary pressures and holding cash levels larger than normal in order to protect against market declines and broad volatility.

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