Market Pulse: Appropriate to blame Bernanke?
June 25, 2013
The selling of stocks and bonds in recent weeks was reaction to Ben Bernanke's saying what we all knew — the Fed can't buy bonds and mortgages at this rate ($85 billion/month) forever, and sooner or later it will buy fewer until it buys none.
Is all the selling because of Bernanke? Not so fast. While Bernanke's comments are a convenient explanation for the market's sell-off, the truth lies elsewhere. Prior to the recent selling the S&P 500 was up 17 percent year-to-date and long overdue for some profit-taking (6 percent). Profit-taking can be triggered by many things … or by nothing at all. It just happens. Invariably, the media and market observers point a catalyst. In this case, it was Ben Bernanke and his timetable to end QE if this and that happens.
The Fed will slow down its purchases when the economy is in better shape, inflation rises and the employment picture improves. Bernanke said so … again. But the Fed is ready to buy even more bonds if the economy loses steam or inflation stays far below its 2 percent target. He said that, too. Bernanke went on to add that if economic forecasts prove correct (a huge "if"), bond purchases might end by mid-year 2014 and a boost in the short-term rate might occur a year later, assuming the economy stays on a growth track. That timetable was new. Don't count on it. Policy will depend on future economic data; a lot can happen along the way.
While many investors are jumping to the money market, they won't be content there for long. The need for income will trump all else and investors will continue to focus on better-yielding stocks, which won't give much ground. Should investors sell a stock that yields 3.5 or 4.5 percent to hold cash that pays nothing? If its dividend would be cut, yes. If long-term interest rates will soar and the stock's yield would no longer be attractive, probably. But long-term interest rates won't soar without a sharp rise in inflation. Commodity prices are in a free fall and there is no pressure on labor costs. Forget inflation.
I expect bond yields will rise to normalized levels. That isn't far from here. Once there bonds won't offer serious competition for quality stocks with good yields. That will become clear soon enough.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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