Ben Wants You To Spend Cash
Advisors Capital Management
By John Petrides
September 17, 2012
This week the Federal Reserve launched its third round of monetary policy easing in as many years. Under QE3 (quantitative easing), the Fed will purchase $40 billion of mortgage backed securities on a monthly basis with the purpose of continuing to fuel the housing market. Under QE3, the Fed said it will keep its zero interest rate policy until mid-2015, with the goal of removing market assumptions of a rising rate environment. The Fed is and always will be data dependent, so all of these actions are subject to change. However, the current data on inflation (low) and unemployment (high) allow the Fed to continue these stimulative tactics. As is the case with every round of QE, higher risk assets (stocks) have outperformed lower risk assets (bonds and cash) as investors ask themselves, “If I am not going to get any return on my cash, and bond yields are so low, then I need to get return on my money somehow, maybe buying shares of a healthy mega-cap company like GE with a 3% dividend yield (almost 2x the yield on a US Treasury) isn’t such a bad idea?”
Bernanke is hoping that this continued run of historically low interest rates will finally force the consumer to take out a loan and buy a car. Or move out of their rising rent apartment and buy an affordable home where rates are low and prices depressed. Or maybe reallocate their 401k from a bond mutual fund into a stock mutual fund. On the business side, Bernacke is hoping that the entrepreneurial spirit will continue and businesses of all shapes and sizes will take advantage of these low rates, and reinvest into new technology and other capital expenditures. The Fed Chairman’s ultimate goal is to “punish” consumers/investors for holding onto cash and forcing them to put it to work, which will stimulate demand and the job market. Although the Fed has proven the effectiveness of its role as the lender of last resort and took heroic actions in 2009 to save the financial system, engaging on its third round of QE signals that they are still not satisfied with the results and pace of recovery. Hopefully by now, with over four million jobs added since the end of the financial crisis, and with the housing market recovering, enough momentum has been built for this round of QE to snowball. Risks still remain. With the elections and fiscal cliff on the horizon, and with Europe talking a good game, but still light on details as to the implementation of its actions, and with the Middle East getting more contentious each day, risks are still very real.
What should investors do? None of the Fed actions should change an investor’s financial objectives. Financial objectives should be established based on income needs, an investment time horizon, risk tolerance levels, and specific tax situations. If an investor needs income, they should not become more risk tolerant because the stock market is up, but should be diversifying their income stream into MLPs and high dividend paying stocks because an all bond portfolio is no longer a viable solution. If investors have become uncomfortable with the market volatility over the past few years, then they should look to take a balanced approach to investing, overweighting equities to bonds. However, if an investor has a longer term time horizon, can withstand some volatility, and does not need income now, then they should explore a growth with income or growth strategy. The market has had a strong run recently, but there is still value to be had in certain sectors. If you have any questions or want to discuss ACM’s strategies in more detail, please feel free to contact us.
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