Created in 1913 with the enactment of the Federal Reserve Act, the Federal Reserve (the Fed) is the central banking system of the U.S. The Fed functions as the bank of the U.S. government, overseeing the nation’s financial institutions. As the central bank, the Fed safeguards and manages the U.S. economy and its money supply with its economic and monetary policies, which makes it a very powerful global player. Ben Bernanke is the current chairman of the Federal Reserve.
One of the most interesting debates regarding monetary policy is emanating from the Federal Reserve members themselves. The Federal Reserve’s current monetary policy program includes an $85.0-billion monthly asset-purchase program. Recent comments made by many of the Federal Reserve members indicate that they are as unsure about the current monetary policy program as the rest of us.
Increasingly, it appears that more Federal Reserve members are leaning toward reducing and even eliminating the current aggressive monetary policy program of bond buying, and doing so sooner rather than later.
Conversely, there are still several Federal Reserve members who currently vote on monetary policy and want to continue the asset-purchase program, as they don’t see an economic recovery coming anytime soon.
This divergence makes it extremely difficult to predict the future of monetary policy. This is important, because when the Federal Reserve indicates that it will begin reducing its bond-purchasing program, it will have large ramifications throughout various markets.
Personally, I have been of the opinion that the Federal Reserve will begin to reduce its aggressive monetary policy program, or at least indicate that it plans to do so, later this summer or early fall. This shift in monetary policy, I believe, will cause many assets to decrease in price, with bonds being sold off and stocks getting hit as well.
Economically, there are many mixed and conflicting data points. Both vehicle sales and housing are strong points in the economy; however, manufacturing still continues to lag. As well, the recent survey by the Federal Reserve Bank of Philadelphia indicated that current manufacturing conditions are weak, but that business owners are optimistic … Read More
The housing market continues to vault ahead. We are seeing strong housing starts and the flow of building permits in the pipeline. Home prices are also steadily moving higher.
The S&P/Case-Shiller Home Price Index, comprising the 20 largest U.S. metropolitan cities, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
Looking at the chart below, notice the S&P/Case-Shiller index is currently at its highest point since late 2008, when the subprime credit crisis was in full bloom. Home prices remain well below the levels we saw in 2006, prior to the housing market meltdown.
You can thank the Federal Reserve for creating the ideal environment for the hot housing market via its strategy of record-low, near-zero interest rates and the continued buying of $85.0 billion monthly in bonds to drive down the financing rates.
Chart courtesy of www.StockCharts.com
You can feel the housing market is ready for a bubble, but the trend continues to point higher, albeit at a slower rate and with interest rates inevitably going higher. You need to be careful; but for the time being, the housing market is where it’s at.
I would be hesitant to touch the homebuilder stocks, due to their already massive gains. The chart of the S&P Homebuilders Index below shows the steady upward trend since December 2012, as indicated by the parallel blue lines. Yet also notice that prices have been rising higher without any major adjustment back to the bottom support line since late April. Look at the area marked by the red oval: this is the downside risk to which you are exposed. As … Read More
There continues to be mixed data regarding the strength of the economic recovery in America. This is creating an interesting divergence between the level of the S&P 500 and the growth rate of the economic recovery, which is far less than many had expected so far.
The Federal Reserve Bank of Philadelphia recently released its index of manufacturing activity, which dropped to -5.2 in May, versus a reading of 1.3 in April. (Source: “Business Outlook Survey,” Federal Reserve Bank of Philadelphia web site, accessed May 17, 2013.)
The survey shows no consistency over the past seven months regarding the current conditions of the economic recovery. The report indicates that the economic recovery has oscillated between positive and negative readings. Current demand for manufactured goods dropped substantially to -7.9 in May, from -1.0 in April. As well, the level of inventories increased to 4.1 in May, versus -22.2 in April.
This indicates that for the surveyed businesses during the month of May, there appears to be less demand for manufactured products, and inventories are piling up, which is clearly not a sign of strength. However, the S&P 500 continues to move higher. The question is: is this upward movement sustainable?
Obviously, no one can predict the future, but investors in the S&P 500 try to anticipate future shifts in the business landscape. While the economic recovery is currently weak, people who are now buying the S&P 500 believe that growth is close at hand. The current data do not support such a strong economic recovery; however, there is the possibility that such a recovery might occur.
One such data point that … Read More
There is simply nowhere else to put your money to work, which is why the stock market continues to edge upward to new record highs.
You can earn a yield of 0.23% on a two-year U.S. Treasury, 0.79% for five years, 1.90% for 10 years, and up to 3.13% if you extend it to 30 years. (Source: “United States Government Bonds,” Bloomberg, May 17, 2013.)
Of course, unless you have tens of millions of dollars to invest, I highly doubt you, or anyone for that matter, would be happy with these petty returns on bonds.
You could always go out and buy Spanish 10-year bonds yielding 4.29% as of Friday. Heck, you can do this out of your own kindness and help Spain out of its financial crisis, with an unemployment rate at over 25% and massive debt loads that will hinder the country for decades.
Or you can simply invest in higher-yielding U.S. blue chip companies, such as General Electric Company (NYSE/GE), Johnson & Johnson (NYSE/JNJ), and The Procter & Gamble Company (NYSE/PG), which all offer dividend yields of more than three percent.
The reality is that investors have been rushing into the stock market and not wanting to miss out on the Wall Street party, which appears to be attracting many party goers.
JPMorgan Chase & Co. (NYSE/JPM) is the party organizer and the biggest bull on Wall Street after coming out with a year-end target of 1,715 for the S&P 500. Now with over seven months left in the year and with the index already at 1,660 as of last Friday, another 55 points in this frothy … Read More
Bank stocks have been one of the strongest sectors in the market over the past year. Bank stocks have rallied sharply after many investors dumped shares on fears that the financial crisis might worsen. Those fears obviously never materialized, and many bank stocks have begun to resume paying dividends and generating profits.
There are two questions I am often asked: 1) is it too late to incorporate bank stocks into one’s investment strategy; and 2) if someone has already owned bank stocks over the past couple of years, is this the time for that investor to start taking profits?
Since the fall of 2011, an index of bank stocks has almost doubled in value. Clearly, an investment strategy that owns a number of bank stocks has seen significant gains in this sector. But no one can rationally expect this type of return to continue forever.
Part of my cautious view on bank stocks, in terms of reducing the sector weighting in an investment strategy, is the fact that there is a limit to upside capital appreciation in every sector. A big question when developing an investment strategy: what is the future outlook for the sector?
Obviously, the low-hanging fruit has already been picked when it comes to bank stocks. Regardless of what was thought about bank stocks in the past, as an investor you are only interested in the potential for growth in earnings and revenues. Large gains have already been realized; now we need to consider how bank stocks fit into an investment strategy over the next decade.
Large concerns for bank stocks shareholders are increased regulation and a … Read More