Market Pulse: A little profit taking | SierraSun.com

Market Pulse: A little profit taking

David Vomund

From time to time in this long bull market investors have sold stocks in fear that the day would soon come when the Fed becomes less accommodative, then steps aside and eventually begins to raise interest rates.

They did it again after Bernanke spoke to congress. My message to investors: "Move along folks, there's nothing to see here."

Bernanke merely stated the obvious — some day the Fed will become less accommodative. Of course, the Fed can't buy bonds forever, so they'll begin to buy fewer and fewer until they stop.

That tapering process could begin in the fall or maybe next year. Much depends on the economy. Raising rates is another matter. That day won't be coming anytime soon.

Here's why: The Fed slashed rates to near zero in 2009 because the employment picture was dismal. Despite trillions spent and rock-bottom rates, it is still dismal. Raising rates would be counter productive and make matters much worse.

There is another reason. Inflation is running well below the 2 percent level the Fed is targeting. Falling commodity prices, in part due to a recession in Europe, slowing growth in China and a rising dollar, have kept inflation low.

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Why does inflation matter? While over the long term earnings are the most important factor for stock prices, the level of interest rates determines the value investors put today on future profits (price-earnings ratios).

Low interest rates mean higher prices, so those of us who believe that expanding price-earnings ratios will boost the market have reason to cheer.

Yes, at some point the Fed will gradually end its bond-buying program. If economic growth picks up and unemployment falls well below 7 percent, perhaps a year or two from now, the Fed will adopt a neutral stance and later begin to inch up rates if the economy is so strong that inflation becomes a problem. Think years. Selling stocks now in anticipation of rates rising years from now makes no sense and would prove costly.

Goldman Sachs recently raised their forecast for the S&P 500, seeing gains of 5, 9 and 10 percent in the next three years, pushing the Index to 2100 by year-end 2015. They, too, see multiples expanding. They also see dividends rising 30 percent over three years.

A little multiple expansion is built into their forecast, plus solid earnings growth and the attraction of rising dividends. Goldman has it right. Never mind the inevitable bouts of profit-taking. There are even better days ahead.

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 adviser before purchasing any security.