Is More ‘Stimulus’ on the Way?

by Richard Band | June 7, 2012 10:45 am

Wall Streeters are drooling again.  Stocks soared Wednesday , with the S&P 500 index clocking its biggest percentage gain of the year, as speculation grew that Sugar Daddy Ben Bernanke of the Federal Reserve might be getting ready to unload another sack full of candy bars.

Exactly what form the next round of Fed “stimulus” might take is still unclear at this point.  However, the chocaholics of the financial community remember how the stock market (gold, too) reacted after the central bank announced QE1, QE2 and Operation Twist.  Nobody wants to miss out on another Fed-induced sugar rush, with the short-term profits it brings.

I’m willing to play along, too, but cautiously.  Yes, it’s quite possible Bernanke will stage yet another candy throw this summer (probably in August or early September, not immediately as some of Wall Street’s greedier types hope).

Furthermore, there’s reason to believe this year’s elections will push the political dialogue nationwide in the direction of fiscal responsibility.  Tuesday’s recall vote in Wisconsin, which resulted in a surprisingly strong affirmation of Gov. Scott Walker, may herald even bigger changes at the national level.  If so, we can expect investors to respond accordingly—see this chart[1] of the 1980 market for a hint of what may lie ahead.

Don’t imagine, however, that the nation’s fiscal problems will be solved quickly or painlessly.  It’s well worth remembering, in fact, that for 21 months after Reagan’s victory in 1980, the economy wallowed in recession and the S&P 500 tumbled 27%.  That’s why I’m cautious about the market outlook beyond year-end 2012, even though I’m encouraged by the growing consensus that America can’t wait any longer to deal with our runaway debt and deficits.

How to take advantage of the “break in the clouds” that I see coming later this summer? It’s still OK, even after the bounce of the past few days, to buy dividend-rich blue chip stocks like Baxter International (NYSE:BAX)[2], Emerson Electric (NYSE:EMR)[3], McDonald’s (NYSE:MCD)[4],  and Procter & Gamble (NYSE:PG)[5], all members of our Total Return Portfolio.

I also recommend beefing up your position in high-yield (“junk”) bonds, which track the stock market rather closely but with considerably gentler swings up and down.  If you already have an account with Vanguard High-Yield Corporate Fund (MUTF:VWEHX[6]), our model portfolio selection, you can add to your stake anytime.

Note, though:  VWEHX closed two weeks ago to new investors.  Thus, if you don’t have an account already, you might buy, instead, MetWest High-Yield Bond Fund (MUTF:MWHYX[7]), our “junk” pick for the Fund Supermarket Portfolio.


  1. chart:
  2. BAX):
  3. EMR):
  4. MCD):
  5. PG):
  7. MWHYX:

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