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Steer Clear of Betting on the Fed Meeting

Each round of easing has produced diminishing returns for stocks


The Federal Reserve wraps up a regularly scheduled two-day meeting Wednesday, and the market is breathlessly awaiting news of what Chairman Ben Bernanke & Co. will do — if anything — to stimulate the economy.

With U.S. GDP growth at an anemic sub-2%, high unemployment and low inflation, the markets are already betting on some form of additional stimulus. That helps explain why stocks are up more than 3% over the past week — despite a steady stream of largely disappointing domestic data.

But whether the Fed extends Operation Twist, opts for a third round of quantitative easing or pulls some new monetary rabbit out of its hat, the best thing you can do with your portfolio is stand pat.

As we said last week about betting on the outcome of the Greek election, unless you’re a trader — a sophisticated professional who’s able to move in milliseconds, employ leverage and hedge complicated bets — betting on the Fed meeting is like the third rail: Do not touch.

That’s to say, if you’re an investor — someone with horizons that extend over months if not years — don’t make any changes to your strategy or directional bets based on what may happen Wednesday afternoon. You’re as likely as not only to hurt yourself and incur needless trading fees, to boot.

After all, there’s been no shortage of market-moving news this week. From elections in Greece and Egypt to a G20 meeting to spikes in Spain’s borrowing costs, stocks have moved higher through it all — but have hardly done so predictably. The election results in Greece were good news — or at least not bad news — and the Dow Jones Industrial Average responded by shedding 25 points. It’s called “selling the news.”

And with stocks rising robustly heading into the Fed announcement — or “buying the rumor” — a sell-off after the Fed’s dispatch on Wednesday afternoon would hardly be a surprise, regardless of what Bernanke says.

There are plenty of other risks inherent in whatever the Fed decides. The way the market has been behaving, Bernanke may be damned if he does and damned if he doesn’t, notes Jeffrey Kleintop, chief market strategist at LPL Financial (NASDAQ:LPLA). The size and duration of any potential Fed program is what’s most important, and that’s where the danger lies.

“The Fed may choose a moderate-sized plan around half the size of the $400 billion Operation Twist to suggest they are keeping firepower in reserve against a further deterioration in the situation in Europe,” Kleintop writes in a new report to clients. “However, a program too small — or merely opting to extend the short-rate guidance to beyond late-2014 — risks disappointing the markets.”

Another factor militating against any bang for more easing bucks is that stocks have gotten progressively smaller lifts from successive rounds of easing, notes Liz Ann Sonders, chief investment strategist at Charles Schwab (NYSE:SCHW).

“The problem is that each round of easing by the Fed — rounds one and two of quantitative easing (QE1 and QE2), followed by Operation Twist, in conjunction with the European Central Bank’s (ECB) Long-Term Refinancing Operations — have produced diminishing returns, as least as far as the US stock market is concerned,” Sonders says in a new report to clients.

Just have a look at this chart from Schwab, and you can see that central bank firepower has gone from A-bomb to bazooka.

And don’t forget: As much as the market has been jumping around, it’s no higher now than it was in mid-February, with low volume exacerbating each and every twitchy uptick and downtick.

The best thing an investor can do is not get caught up in the volatility and headlines, and instead focus on what emerges to form the bigger picture, Kleintop says. Let the smoke clear after this notably noisome week before making any decisions on what — if anything — to do next.

Besides, a hugely important market-moving earnings season is just three weeks away.

Article printed from InvestorPlace Media,

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