Much of the last 5 years of growth we’ve seen has been tied to monetary stimulus. The good news is that we’ve seen our economy rebound tremendously from the lows of 2008, the bad news is that it unfortunately can be compared to a drug addiction. Our “Free Market” is heavily addicted to Federal Reserve System (FRS) assistance.
Any subsequent bouts of quantitative easing that the FRS introduced were less and less effective than the prior round. Also, every time the FRS hinted that it may take some money away last year, the markets went through withdrawals. I’m not saying our economy is a junkie, I’m just saying that we have to be very careful about how we kick the QE habit!
Exiting this heavy stimulus strategy (Tapering) has proven to be boring, counter-intuitive, and frustrating at various times. In all, it’s absolutely necessary. While I do firmly believe that Tapering will continue, it doesn’t mean that it will be linear. FRS Chair, Janet Yellen, has made it very clear that she intends to be accommodative to economic needs as opposed to staying to a strict program. While this helps market participants feel like there is a back stop, there isn’t much fire power left in the FRS’ artillery.
I feel this consideration is pertinent as we move into 1st quarter reporting season (a weak quarter in recent years). There will be the additional stress of the harsh winter’s impact on reports to be worried about. These issues make me think the FRS may start considering changes to their current strategy. Each successive stimulus package has yielded less and less results, and while I don’t anticipate a full reversal of policy, a slowdown of Tapering (or even a 6 week departure) could have the desired effect. Much else may not be needed as it will return the market to a zero QE by the 1st quarter of next year.
Jobs data continued to support the current view on Tapering as reports were stronger, but not up to expectations. A clear positive was increases in the participation rate as more people are re-entering the workforce, showing optimism regarding the job market.
The week was ultimately capped off by a strong sell session on Friday, mainly as continued selling occurred in Technology and Biotechnology. This trend may continue as Biotechnology was a major gainer in 2013 and profits are being taken.
China introduced a small fiscal stimulus program that should help strengthen key consumption metrics for GDP and bring their economic growth back in line with their annual GDP expectation.
The Eurozone is experiencing a weak inflation environment which has many economists believing that a program similar to Quantitative Easing will be introduced to help prevent deflation. If this were the case we could see interest rates in European issues fall as we saw in the US.
As with Stimulus in the US, 2 things appear to be constant:
1) The more packages released, the less effective the programs are.
2) Exiting these programs may prove more difficult than solving the initial problem.
In all, the programs being implemented are necessary in the wake of 2008 and we’ll find a way to exit the strategies (painful or not), but navigating the perils of the exit strategy is not an issue faced by only fixed income investors, but all investors. Implementing and maintaining a well-blended portfolio will be the key to successfully getting through this period of extraordinary central bank policy.
If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.