Streetwise

Lauren Rudd

Sunday, June 30, 2013

Fed Worries are Overblown

It is summertime once again and the living is easy...or at least it used to be. Nonetheless, the Fourth of July is the unofficial start of the beach and barbecue season. It is also when everyone asks the same question...will we see a summer rally on Wall Street between July 4th and Labor Day.

Statistically, July is the best month for stock prices in terms of percentage gain. Furthermore, the Dow Jones Industrial Average has rallied during 60 of the past 67 summers. And the preponderance of data indicates that the stock market is subject to seasonal quirks.

Of course if you subscribe to the theory that the stock market represents a series of independent events, then a rally has exactly the same statistical probability as no rally. And there is no doubt that the annual expectation of a summer rally is partially the consequence of the fiction and fantasy that always seems to envelop stock trading.

At its worst the folklore simply contributes to the market's overall mystique. Yet, long-time observers of the stock market concede that the stock market does exhibit seasonal tendencies. Of greater significance is that Wall Street is considered to be a forward looking economic indicator and currently the Street seems to portend potential rip currents ahead.

The Mad Money host of CNBC, Jim Cramer, was on the money when he said the market’s bulls have a lot of enemies. For example, many larger bond investors entered the equity markets when interest rates were in the basement and dividend yielding stocks became the only place for yield. However, as these shares increased in price the yield fell but the market risk did not. Not a palatable situation for those whose forte is fixed income investing.

Meanwhile, the emerging markets became a trap as a result of the strengthening dollar. To make matters worse, many who were long shares of Chinese companies found that the economic data out of Beijing certainly called that thesis into question. As a result many China bulls are now running for cover.

Recent comments from Fed Chairman Ben Bernanke certainly did not help companies related to homebuilding, raising concerns that higher mortgage rates would adversely affect the housing industry. In fact, mortgage applications have started to decline.

Finally, many are simply trying to get ahead of a potential decline in profitability, so they are selling before July’s earnings season gets under way.

So how does all this affect the average investor? Once again the markets offer up an opportunity to invest in quality companies at bargain prices. The gloom facing the markets has been way overdone, an overreaction to concerns over when and how the Federal Reserve will withdraw its support of the economy.

Although Bernanke has made it clear that QE3 will one day come to a close, he also made it clear that the scale-back in the asset purchasing program will happen slowly and only when the economy shows significant improvement. That is unlikely to occur before the end of the year or maybe not until sometime in 2014. Interest rate hikes, he said, are a separate issue and "still far in the future, probably 2015."

Yes, the latest GDP numbers were a disappointment although they probably helped to cement continued stimulus by the Fed. Nonetheless, the economy is expanding and job growth has improved, albeit slowly. The euro zone debt crisis has abated somewhat. And despite the jitters, global central banks are far from ending easy money policies.

So what should you do? My best advice is to ignore the day-to-day noise and continue with what would best be called “buy and hold goal oriented investing." However, buy and hold is not the same as set and forget. There are macro-economic factors to consider when setting up and modifying your portfolio, but these aren't decisions that should be made either late at night or in the throes of a panic over Fed policy.