Janet Yellen sailed through questioning by the Senate Banking Committee last week, and it’s all but certain that she’ll be confirmed as the first female Federal Reserve chairman. Investors viewed that as a signal that monetary policy for the foreseeable future will be more of the same — in short, easy money as far as the eye can see.
Now, I’m no fan of the Fed’s quantitative easing (QE) programs. But among investors, that is clearly a minority opinion. Imagine where equities would be — not to mention the labor market and the economy — if the central bank had never embarked on its money-printing spree. The bottom line is that QE matters to the markets. And if you care about the value of your portfolio, what matters to the markets should matter to you.
|Where would the market be if the Fed hadn’t gone on a money-printing spree?|
Another Fed-Inspired Rally
I wasn’t the slightest bit surprised that stocks staged a rally last week, in anticipation of an easy confirmation process for Yellen. But the latest leg in this bull market is not just based on the idea of a seamless transition at the Fed. In fact, everything seems to be setting up for a continuation of the rally: Cyclical assets are holding up well, while defensive assets — including bonds — are not in great demand. Fear peaked in October. And buyers keep stepping in whenever the S&P 500 approaches support levels.
Perhaps the most cogent argument in favor of the status quo comes from Mohamed El-Erian of PIMCO, the largest bond manager in the world:
Last Thursday’s hearing signaled that, despite imperfect policy tools, the Fed is committed to keeping its foot on the accelerator even though outcomes may well continue to fall short of expectations, and even though the “costs and risks” are likely to rise. If it ends up making a mistake, something that it will try very hard to avoid, it would likely be one of excessive accommodation rather than premature tightening.
The Fed’s Effect on Your Portfolio
The financial markets seem to agree with El-Erian’s assessment. And judging from the recent strength in U.S. equities, they believe in the wisdom of the adage: “Don’t Fight the Fed.”
As you can see, the S&P 500 remains in a bullish uptrend, with price holding steady above the 3- and 5-day exponential moving averages.
The trend is also bullish for technology stocks:
Of course, this type of stock-chart analysis does not tell us the whole story. But technical analysis is a valuable tool that helps us understand and monitor economic conditions and fundamental concepts.
For example, when indexes or stock prices dip near a support level, investors tend to perceive value, and they buy. Conversely, when assets approach resistance, investors tend to believe they are overvalued, and they sell.
In this instance, both technical and fundamental analysis suggest that this bull market still has further to run. I’ve always said that, as investors, we must be open to all outcomes. And that includes bullish outcomes.