Everything in capital markets is basically on hold until there is certainty regarding monetary policy and the prospects of a reduction in quantitative easing (QE).
The stock market reaction to the Federal Reserve’s last monetary policy statement wasn’t good, and there was seemingly a misinterpretation by institutional investors as to what the central bank’s actual intentions were for reducing QE. But stocks recovered, and the equity market remains resilient.
Over the last several months, equities actually sold off on good news. This is the market’s counter-intuitive reasoning: better economic news increases the likelihood that monetary policy will be tightened, so investors sell off.
But the economic news I’m reading lately isn’t that robust. In fact many key statistics are coming in well below Wall Street consensus.
But capital markets aren’t as interested; it’s all about monetary policy and then the upcoming earnings season—certainty from the Fed first, then certainty from corporations.
I repeat my view that there isn’t a lot of new action to take, particularly in equities. The stock market is right at its high; it hasn’t really had a meaningful correction in ages and is very much due for a break.
In terms of portfolio strategy, I’m still a big fan of dividend-paying blue chips, peppered with a few aggressive positions. The healthiest part of the stock market remains well-capitalized large corporations that have more cash than they know what to do with. The prospects for increasing dividends in 2014 are robust. (See “Why I Like This Blue Chip So Much [55th Dividend Increase Just Announced].”)
In terms of monetary policy, we know that short-term interest rates aren’t going to go any lower. A reduction in the amount of QE would be ideal, and it’s always good to have central banks out of capital markets. But the U.S. economy, while having come a long way from just a couple of years ago, isn’t strong enough yet to power itself. It’s highly likely the Federal Reserve will be very active with continued monetary policy easing well into next year.
Financial results from corporations are always critical and there’s been genuine worry in capital markets about rising longer-term interest rates and their effect on economic growth. Clearly, the marketplace must be left to find its own equilibrium, and I expect this upcoming earnings season will actually turn out to be quite solid—albeit, far from robust.
Everything trades off the Fed and its monetary policy moves. But with the degree of intervention by the central bank being so large, small adjustments in monetary policy won’t actually do anything for the Main Street economy. Interest rates have been artificially too low for too long.