In the popular original Disney film Mary Poppins, Bert, a jack-of-all-trades, is portrayed as Mary’s best friend and at times trusted advisor. While Bert couldn’t have known it at the time, his description of the weather serves as the perfect analogy for current conditions in the financial markets.
Winds in the east, mist coming in.
Like somethin’ is brewin’ and ’bout to begin.
Can’t put my finger on what lies in store,
But I fear what’s to happen all happened before.
That’s because the current Fed policy of creating more debt to solve a debt problem can’t and won’t work in the long term. But for now, it can create an environment of stable disequilibrium that can temporarily suspend the fundamental principles of economics.
As I’ve pointed out in previous Money and Markets columns, it’s the pessimist that rails on incessantly about the absurdity of the Fed’s actions. On the other hand, it’s the realist that accepts things as they are and establishes a money-making strategy that fits with current circumstances.
|We are likely to remain in the sweet spot for stock investors.|
To understand current market conditions, investors need to look no further than newly appointed Federal Reserve Board Chairman Janet Yellen’s pragmatic comments to House lawmakers last week. In her prepared remarks to Congress on Tuesday, she explained that she expects “a great deal of continuity” in the Federal Open Market Committee’s approach to monetary policy.
In her first report on monetary policy, Yellen told the House Financial Services Committee that”If incoming information broadly supports the committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”
What’s more, she emphasized during the question and answer session that the Fed would pause its tapering of asset purchases if there was a “notable change” in the economic outlook, and increase asset purchases again if there were “a significant deterioration in the economic outlook — either for the job market or if inflation would not be moving back up over time.”
She then borrowed a phrase from her predecessor, Ben Bernanke, in his final speech as Fed chair by stating that “purchases are not on a preset course” and that “the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
What all of this means is that we are likely to remain in the sweet spot for stock investors that I described in last week’s Money and Markets column as characterized by tepid economic growth and low inflation. Make no mistake, this period of stable economic disequilibrium can’t and won’t go on forever.
But it’s my view that there is still enough runway ahead for investors who are selective and choose carefully to make money, as long as they concentrate their purchases in the world’s best-of-the-best growth companies. These are companies with global reach and sustainable earnings power, such as PepsiCo, Inc. (PEP).
This past Thursday, PepsiCo demonstrated its impressive earnings power by beating analysts’ expectations when it reported fourth-quarter and full-year 2013 results. The food and beverage giant’s pricing and productivity gains and strong performance in the snacks business drove the better-than-expected earnings. These gains made up for the aggressive marketing investments, higher commodity costs, and an increased drag from forex and higher taxes.
After all, growth is the magic elixir that cures all ills in a period of Fed-induced stable disequilibrium that’s keeping the foul weather offshore for now.