Federal stimulus has played a major role in the market's multi-year rally and as long as it continues the U.S. economy will be propped up by the Fed action and index ETFs Dow Jones Industrial Average (NYSEARCA:DIA) and S&P500 (NYSEARCA:SPY) will reflect this support and continue to rise in value. The bull market is steadfast with Fed support and any pullback is likely a buying opportunity.
The S&P has increased during the stimulus period now nearly to its all time highs, closing Thursday within just over 2 points of the mark. The main difference from the 2007 highs is that this time the S&P visits this level with embedded and continuing Fed support. The S&P is coddled by Fed doves like Ben Bernanke, chairman of the Federal Reserve, who continues to advocate for stimulus even while the Dow and the S&P each open Friday's trading with goals of all-time highs.
September marked the beginning of a third round of quantitative easing, or QE3. The policy is directed at keeping interest rates low but is a temporary measure. The policy entails bond buying knowing rates will eventually rise where prices will in turn fall. The loss is to be absorbed by the government and then of course the taxpayers but in a gradual way, down the road. A future bearish sentiment simply does not apply to an ongoing bull market.
The Fed action continues to create opportunities in the market, it is difficult to build a case against conservative forecasts that indicate sluggish domestic growth. With the current Fed action, U.S. GDP numbers are more than likely to surprise to the upside throughout 2013. Despite Bernanke and the Fed presenting QE3, also known as QEinfinity since it has no set termination date, his Federal Reserve has gained unwanted ground against the Japanese yen. Many opponents of stimulus and bears alike feel this is an indication that the positive effects of stimulus have waned and exchange risk is becoming more of a concern than stimulus compensates for.
However, Federal Reserve efforts will peel back the value of the dollar eventually. QE3 will last through 2014 into 2015 and investors can be confident that the Fed will continue to support the economy and therefore the markets. Still, as many of the G-20 nations ease their economies, one cannot help but feel somewhat concerned about the medium to long term implications. Drastic global easing can lead to inflation and interest rate hikes among other known and unknown outcomes. But the key takeaway is that no country would execute the easing process if there were not short term benefits. While the long term effect may be quite negative for some, the main risk is the one of missing out on a run through all-time highs in the in the SPY. Bernanke's number one focus is helping U.S. businesses improve domestic unemployment; nearly regardless of other global currency pressure he is not likely to allow the dollar to strengthen against many global currencies because of this. It is essential to consider the opportunity the Fed is creating for investors in U.S. equities.
After QE3 was announced in December, the Fed was pumping $85 Billion into the economy every month. A previous Fed easing policy called the Maturity Extension Program and Reinvestment Policy, also known as Operation Twist expired at the end of 2012 so the total easing per month is $40 Billion. The European Central Bank's current president, Mario Draghi is not as dovish as our Federal Reserve or the Bank of Japan, but is very accommodative in regard to monetary policy. His measures may be insufficient as Europe is threatened by another recession. The ECB is joined by many countries continuing to respond to economic crises with such monetary policies that will continue to threaten to weaken their currencies. What does this mean to U.S. investors? The need to be mindful of exchanges is in plain sight but so is the great opportunity for a quality stock picker that acts on fundamentals and pays attention to central bankers. More simply, investors will seek capital protection as well as yield in the U.S. markets where the concern for a recession is far less expected.
The intuitive outcome is that despite World Bank forecasts of continued sluggish growth; a stimulus-oriented United States could continue to see low interest rates, improved exports and job growth, United States companies could surprise analysts with growth that could occur faster if other risks do not materialize. While the consequence of inflation is a deep concern it is a long term issue. The stimulus has trickled into the stock market and will continue as long as necessary. Something to consider down the road, come 2015 or 6.5% unemployment when the faucet turns off and the Fed will begin to consider terminating the easing policy is the painful exit plan. Until then, the Federal Reserve is doing everything it can to help the economy grow and U.S. companies are major beneficiaries of these programs.
Despite recent widespread European credit downgrades, China uncertainty, low global growth forecasts, and fiscal policy legislation failures, steady increases in the S&P and record breaking momentum for the Dow continues. The apparent fact is that if for anything, the Fed works for the stock market. Troubles have not stopped Bernanke's Fed and will not likely through the end of his term and through his likely replacement in Janet Yellen. If easing continues as scheduled, through a thoroughly established recovery, there is little reason to doubt continued record highs until a more imminent end to the current monetary policy becomes apparent.
It is particularly important to remember as the S&P closes in on its own record highs, which would be confirmation of record highs seen in the Dow recently, that the Fed wants investors to make wealth in the market. However, altitude sickness applies at these index levels and undoubtedly investors remember the generational low shortly after last time the S&P reached its last high in 2007 and there is a legitimate concern for a dramatic correction. Concerned investors should hedge but with Bernanke at the helm of the Fed, dips in the market will continue to be buying opportunities. The Fed is going to continue easing, and as we have seen over the past four years, easing works for the stock market. In the current environment equities will continue to benefit through the U.S. economic recovery. Hedging for downside is essential as major resistance is reached volatility increases are expected but forsaking a long position could leave investors with regret since the resilient SPY still has room to run.