Round And Round It Goes
Round and round it goes, and where it stops the Chairwoman knows. Wall Street is intensely waiting for the next Federal Reserve move as if watching for white smoke at a papal conclave signaling the election of a new Pope.
Interest rate levels bear materially on stock valuations. With the last Fed increase almost ten years ago, the progress of rates reversing upward is of major importance for stocks, bonds, real estate and commodity prices. The financial crisis of 2007-08 came dangerously close to plunging the world into another great depression. Scars remain but our Federal Reserve Board took steps to restore liquid markets and induce economic recover with monetary policies.
The Fed has two statutory goals: to maintain the value of our currency and to induce “full employment.” The current strength of the U.S. dollar validates the steps it took through sustained programs of buying bonds. In contrast, the Euro Zone countries flirted with austerity programs and reduced spending, polices which have never worked to get economies moving again.
The outgoing Bush and new Obama administrations managed to get moderate stimulus spending funded, which provided some impetus toward recovery. More would have helped but most of the U.S. Congress seems to have chosen political expedience over the national interests. Its shameful record includes damaging the U.S. credit rating while pimping for votes by threatening shutting down the government or blocking sensible legislation on unprincipled whining.
This week, for example, the Senate failed to pass legislation addressed to stop human trafficking by fining sexual predators. One senator is even crusading to audit the Federal Reserve when more appropriate action would be to erect statues to Mr. Bernanke and Ms. Yellen in the Senate Dining Room.
Returning to reality, assessing investment opportunities requires continuing assessments of probable outcomes. Stocks initially slumped Wednesday when the Fed policy committee removed a promise to be “patient,” an indicator interpreted to mean rate increases were coming in months. Later, Ms. Yellen commented, “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.” Financial markets took a deep breath of relief and both stock and bond prices shot up like rockets.
What seems clear is that the Chair, after just over a year, is taking a firm grip on the world’s leading central bank and will not be pressured into taking away the supports of lower interest rates. This indicates the Fed will take an even stronger role in steering the economy and will not move until there are data showing that employment and other indicia of economic growth demonstrate that these support struts are not needed.
This strengthening leadership is favorable to most asset classes. As always, I recommend that stock investors concentrate on larger companies with proven prospects for superior growth. Blue chip stocks can invite complacency and I continue to suggest reducing stock positions in General Electric (GE-$25) while adding United Technologies (UTX-$119). Like GE, Intel (INTC-$30) has substantial resources and a nice yield but Taiwan Semiconductor (TSM-$24) is increasingly competitive. I am reducing Intel and adding to Taiwan Semi.
Arm Holdings (ARMH-$53), a recent addition to our tech sector, continues to impress. The P/E is high but not excessive in view of the company’s expansion into the auto and embedded intelligence markets. Amgen (AMGN-$168) continues its leadership in biotech. It has a drug contending for approval in the post-statin cholesterol-lowering market. FedEx (FDX-$173) profits jumped on lower fuel costs; its stock is also an excellent buy.
As we move into spring, stocks may stagnate for a while but Fed policy has changed the traffic light from yellow to green. As usual, moderate speed is indicated. Next column in three weeks after I return from traveling in Southeast Asia.
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 1995. [email protected] 949.494.1376/800.697.2622
