Enough of a Good Thing
Who would have thought in our lifetimes that the financial world’s answer to the Dos Equis “Most Interesting Man in the World” ad would be two of the most wonkish men in this universe, Alan Greenspan and his successor, Ben Bernanke? We can almost hear them saying in a deep, Spanish accent, “I rarely ever utter anything that even a Wharton Business School graduate could understand. However when I do, it’s usually when I am speaking before Congress!” These are the men who have given us in our nightly news lexicon: irrational exuberance, TARP, modest softening, inflation targeting, demand for dollar dominated assets, QE 1-3 and now….tapering. The slowing of Quantitative Easing or tapering has the world’s financial markets in apoplexy. “Is he going to slow in June…September?” “What’s that going to do to markets?” How am I going to get my fix of cheap money?” “What will I do to get over my QE-less DT’s?”
Right or Wrong, Ben Bernanke’s Fed has created a Treasury market with long term rates well below 2% and a stock market with some stocks with competitive dividends in excess of that. Before you think that just because markets are at all-time highs so the market can’t go any higher, valuations would say something different. Earnings on the S&P 500 as of May 16, 2013 give the index a Price to Earnings Ratio (PE ratio) of 16.1 which is well below the average multiple of 19.6 over the last 20 years.* This would indicate we have a market that has the potential to go up much further.
What’s causing the Fed to take pause? In a single word….sanity. I have been calling for this slowing or tapering for a year, but I don’t speak with a Wharton accent. The real estate market is accelerating. Home prices increased 9.3 nationally in February with median home prices increasing to $184,300 in March up from $154,600 in January, 2012. Second, the automobile industry is (pardon the pun) rolling. In March, sales increased 3.4% which was the highest total since 2007.**
The only remaining economic inconsistency still is job creation. The Obama administration is running upwind against corporate unrest regarding tax uncertainty and the impact Obama Care will have on their bottom lines. If just one of these conundrums could be settled, there’s no limit on how quickly our GDP could grow.
We are optimistic about the remainder of 2013. Certainly in this cyclical bull market we are in, the second quarter has historically been a bear. However, because of many of the factors mentioned earlier and some of the reasons mentioned in our latest “Weekly” (http://hmc-partners.net/2013/05/21/weekly-market-commentary-buyers-sellers/), we feel that if there’s a pullback this quarter, it could be muted compared to those in the 2nd quarters in 2009-2012. Like swimmers before big meets or boxers before a match, the time is coming for the Fed to taper. We just need to get used to the idea.
• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. • The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. • Stock and Mutual Fund investing involves risks, including loss of principal. • All indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. • The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Sources for Statistics:
* “Market View: Think Stocks Are Overvalued? Think Again.” Lord Abbett Market View: Weekly.
** “Housing Market Accelerates: Home Prices Jump 9.3% in Quickest Rise Since 2006; Gains Seen Across Country,” The Wall Street Journal. 4/30/2013. http://online.wsj.com/article/SB10001424127887323528404578454612657511232.html