The Fed and QE
There has been plenty of uncertainty about fiscal policy in Washington, but there is no doubt anymore about who will succeed Ben Bernanke as Chairman of the Federal Reserve. President Obama officially nominated Fed Vice Chair Janet Yellen, who will take over when Bernanke’s term expires in January.
This increases my expectation that quantitative easing (QE) will continue. At the nomination announcement, Yellen said that “more needs to be done to strengthen the recovery.” And she added, “Too many Americans still cannot find a job and worry how they will pay their bills and provide for their families.” She also said that the Fed can help by ensuring that everyone has the opportunity to work hard and build a better life, so it’s clear she takes the Fed’s mandate to lower unemployment very seriously.
In other words, the Fed will likely keep its money pump primed under Janet Yellen. Weaker economic news, ongoing problems in the job market, the government shutdown, a lack of consensus within the Fed, and rising Treasury yields are all excuses that the Fed will use to continue QE for the foreseeable future. Any tapering will likely be postponed until next year, which should be good news for the market and our stocks as we wrap up 2013 and head into 2014.
Here’s another positive effect of the Fed’s 0% interest rate policy and relentless quantitative easing: They are a “flashing light” for corporate America to continue borrowing in the bond market at ultra-low interest rates (typically 3% or less) and aggressively buy back shares of their stock. This boosts earnings per share (with fewer shares trading on the market), supports the stock’s price, and is an expression of confidence from management.
Our Blue Chip Growth stocks have a median Return on Equity (ROE) of 24.2%, and when a company can borrow well below its ROE, Chief Financial Officers are trained to take advantage of the low interest rates and buy back their stock. Many of our Buy Liststocks have relentless buyback programs, and those buybacks along with improving earnings are reasons why they often bounce back so quickly.
So we have the flight to quality, the Fed and fundamentals pointing in the right direction, and it’s all happening as we hit the strongest time of the year for the market. Since 1928, the S&P 500 has gained 0.6% in November and 1.4% in December. The end-of-year holidays put people in a good mood—and a spending mood—and you also have a lot of year-end pension funding that boosts stocks.
I am especially optimistic this year, and believe that we will have a lot of be thankful for this Thanksgiving.