The Fed Takes Point
Headline news centered on the grave situation in Syria but Wall Street kept its focus on interest rates. Going into the Federal Reserve’s first meeting in two months, commentators predicted the beginning of a decrease in the Fed’s policy of bond purchases and low interest rates. Chairman Bernanke surprised Wall Street by holding course, deferring the monetary “taper,” probably for several weeks and commenting that the Fed had previously been “overoptimistic.”
Wall Street clapped hands as buyers drove both the Dow Jones Industrial and the S&P 500 averages to historic new highs. The Fed was quite precise in clarifying that it would be in no hurry to change its policy until the ongoing slow economic recovery is on a firm foundation. The Federal Reserve takes note of the market impact of reactions to its policy changes; its hint in May of the possibility of a tightened monetary policy rattled stock, bond and mortgage markets. The Fed is clearly determined to avoid a repetition of this reaction.
After lagging the overall recovery, home prices climbed this year with other indicators such as new construction keeping pace. Continuing moderate mortgage rates will sustain this important sector. Even though corporate profits are at record levels, job growth, though steady, remains painfully slow.
The Fed indicated that its eased monetary policy would probably continue into 2014, a much clearer signal than before and one that helped propel the very strong advance in the stock market. Beyond its decision to await more evidence of sustained improvement in the economy and the labor market, Chairman Bernanke placed unusual emphasis on the serious risks to the economy and the financial markets that would follow even a partial government shutdown or a failure to raise the federal debt ceiling.
The Federal Reserve building lies only three miles down Constitution Avenue from the Capitol. There, unusually obstructionist elements in the Congress threaten the economic recovery. It is unusual that the Fed softened these political threats to the U.S. economy through by providing a monetary policy breathing space, during which we will hope that obstructionist legislators can be coaxed to reflect on their oaths “to support and defend the Constitution.”
With the prevailing uncertainties of possible military action, government shutdown and possible higher interest rates, the market’s ability to make new highs is remarkable. Its strength is grounded on record earnings combined with moderate overall valuations. Investors should consider cracking on more sail as we move toward the traditional yearend rally.
Technology stocks are developing momentum. Recent additions AVG Technologies (AVG-$25) and ARM Holdings (ARMH-$48) have moved up a couple of points since recommended here and remain buys. Among larger companies, Oracle (ORCL-$33) beat earnings forecasts modestly and is a conservative buy on 10% growth and continuing dividend increases.
Intel (INTC-$23) and Cisco (CSCO-$24) are both up over 10% so far this year but IBM (IBM-$193) is absolutely flat. New acquisitions and a continuing 10% growth rate indicate an undervalued blue chip. A 1.9% yield with dividend increases for 17 years keeps “Big Blue” as solid buy, particularly in retirement accounts.
General Electric (GE-$24) is similar. Growth is a little under 10% but the yield is 3.1%. Its manufacturing activities are growing as it reduces financial activities that slowed growth after the financial crisis. GE and IBM together add conservative strength to portfolios.
A continuing housing recovery will benefit Whirlpool (WHR-$149) and Masco (MAS-$22). Wells Fargo (WFC-$42) is building a large mortgage portfolio. The mortgage grace period just added by the Fed should work to enhance the stock price of this well-run bank.
As the end of the quarter approaches, analysts will begin looking toward yearend and 2014. Forecasts and estimates for the current quarter were guarded, thus it is probable that a majority of companies will “beat” estimates for the September quarter. Barring a reversal of the economic recovery, earnings reports for this September quarter will probably add further momentum to the current rally.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/