Stephenson Home Meet Stephenson Stephenson Commentary Stephenson Videos Stephenson Media Stephenson Blog Stephenson Commodities Stephenson Book Press Stephenson Speaking Stephenson Contact
Commodity Investing Shell Shocked
Recent Tweets

The market was jolted out of its slumber by the Federal Reserve at its September meeting when policy makers ignored market expectations by deciding not to begin scaling back the Fed’s bond-buying stimulus. While the Fed acknowledged that the U.S. economy was getting steadily stronger, the Fed expressed concern that the rise in market interest rates—which spiked over the spring and summer in anticipation the Fed was poised to change course—had risen too high, too fast.

The decision to refrain from reducing the $85 billion pace of monthly bond buying was based in part on weak conditions in the job market and on concern that the rapid tightening of financial conditions in recent months would have the effect of slowing growth. Treasury yields have jumped since May, when Fed chairman Ben Bernanke first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion.

After the announcement, U.S. stocks rallied sending the S&P 500 to a record close, while gold prices spiked and Treasuries were up sharply. The surprise move by the Fed could cause interest rates to reverse course, and potentially cause the dollar to weaken, as the prospect of higher interest rates increases the demand for the currency.

For months Fed Chairman Ben Bernanke had been hinting that the program—known as quantitative easing, or QE—could be curbed later in 2013 if the U.S. recovery continued at a reasonable pace. As well, bond yields had risen sharply since May and June when Mr. Bernanke first started musing about curbing the economic stimulus. But that didn’t happen. Hiring continued at only a modest pace and factory production and exports stumbled. The disappointing indicators forced the Fed to cut its economic outlook for American growth from a potential 2013 maximum economic output of 2.6 percent down to 2.3 percent while postponing the onset of tapering.

While Ben Bernanke had warned investors that if financial markets continue to take interest rates higher in the anticipation of action by the Federal Reserve, the Fed would have to “push back” against that. And so it has. Although there were some warnings signs, the recent Fed announcement still managed to take the Street by surprise. In fact, it really is a game changer for stocks, heralding in a new era of momentum driven investing.

One of the reasons cited by Ben Bernanke for the reprieve was that President Barack Obama and the Republican-led House of Representatives are hurtling toward another potentially destabilizing fiscal showdown. Just the other week, Republican leaders said their co-operation on a budget for the fiscal year that begins next month and for raising the country’s debt ceiling is contingent on defunding Obamacare, the President’s signature domestic achievement. President Obama rejected this outright. In his comments, Ben Bernanke said that “a government shutdown, and perhaps even more so, failure to raise the debt limit, could have very serious consequences for financial markets and for the economy.”

What was made abundantly clear by the Fed was that the extraordinary levels of stimulus would remain in place until the data shows incontrovertible evidence that the economy has reached escape velocity, Congress passes a budget and interest rates back down from their lofty perch. The likelihood of these three scenarios aligning by the end of this year is close to zero, suggesting that tapering is off the table until 2014. With the policy accommodation likely to remain in place for the foreseeable future stocks are poised to continue their rally in the months ahead.

The sugar rush from the Fed’s non-taper announcement will likely propel the S&P 500 through 1,800 by year end and possibly through 1,900 in mid-2014. Both the S&P 500 and the TSX are up 5% or more from early May, when yields troughed. With tapering postponed for the time being and the Fed to remain accommodative the news is overwhelmingly positive for stocks.

Helping to propel stocks further will be the lackluster bond market performance, which will likely help to spur renewed fund flows into equities, especially as the calendar flips to 2014. Industrials remain one of the most attractive sectors within my investment portfolios as is technology and financials, both re-rated sectors that should benefit from the funds flow into equities.

For those of you who will be in the Toronto area in late October, I will be speaking at the Toronto MoneyShow on October 25, 2013 from 11:00 am to 12 noon.
Join Me
Home | Meet John | Commentary | Videos | Media | Blog | Commodities | Book Press | Speaking | Contact
© 2011 - 2012 John Stephenson. All Rights Reserved