Fed tapering hurts the stock market.
Uh, no it doesn’t!
Do you see why I place so little weight on Wall Street’s day-to-day squiggles? Wednesday, the benchmark S&P 500 dropped 18.3 points. Thursday, it gained 20 points. Sound and fury signifying nothing, except an opportunity for data-crazed pundits to sound off.
I’m much more interested in the longer-term trends—and in that department, there’s both good and not so good news.
The encouraging part of the story: January’s pullback has improved values across a fairly wide spectrum of stocks, including the high-quality names I like to own.
On the other hand, it’s clear that the Federal Reserve is now firmly embarked on a path of gradually reeling in the extremely easy monetary policy of the past few years. Granted, the central bank is still buying $65 billion a month of bonds and mortgages. That’s hardly a credit “tightening” by any definition.
However, the Fed is backpedaling at a time when commercial banks are already slowing the growth of their balance sheets. Take a peek at this chart. Over the past year, bank credit, which consists mainly of loans, has expanded only a little over 1%, the slowest pace since early 2012 (and far below the norm of the last economic growth cycle, from 2002 to 2007).
This sensitive gauge is telling us—contrary to the screams we heard a few weeks ago about an accelerating economy and rising interest rates in 2014—that the primary risk facing us in the next few quarters is a potential business slowdown, with lots of companies missing their earnings forecasts.
Technically, too, the stock market’s own weakness here in January is sending up a caution flare. Since 1950, when the Dow has finished January in the red, the median price gain for the next 11 months has amounted to just 0.46%.
Therefore, as I’ve said repeatedly over the past six weeks or so, you should form your 2014 strategy on the assumption that the New Year will look quite different from 2013. Safety-first investing didn’t help much at all last year; it could be your golden key in 2014.
Until we get further into the year (and the risk of a deeper market “correction” either materializes or passes), you should focus your buying on stocks with strong defensive characteristics, such as above-average dividend yields. I’m still keen on names like Procter & Gamble (PG) and Verizon (VZ), which yield 3.1% and 4.4% respectively.
PG is the faster grower; hence the lower yield. However, both stocks put the S&P 500 to shame, with its paltry 2.1% payout.