The Attack Of The Fed Will Continue - Where To Invest?

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Includes: EUSA, ITOT, IVV, IYY, SCHX, SPY, VONE
by: Gary Bourgeault

Let me say right from the start that one of the most important things for investors to know at this time is that the Federal Reserve is not likely to stop its stimulus program in the near future, as some reports are theorizing.

The only caveat to this reality is if an unforeseen event or calamity takes place that would change the policies of the American central bank. One of those events would be a huge change in the jobs numbers, whereby the unemployment rate plunged to levels approaching the stated goal of 6.5 percent. There is nothing to suggest that will happen any time soon. Another would be rising inflation, which would betray the inevitable effects of the loose money policies the Fed is engaged in. Either of those two scenarios would bring a rapid response from the Federal Reserve.

Interestingly, many economists and business writers neglect the fact the Fed said in its latest meeting notes that it is prepared to simulate even more if it has to, while at the same time saying when its goals are met it won't hesitate to stop printing money.

If a survey of 75 economists is accurate concerning the pace of falling unemployment, it'll fall by about 0.1 percent on a quarterly basis. That would bring the jobless rate down to 6.9 percent in the fourth quarter of 2014. Even that is still above what the Fed is looking for.

The most recent economic data also show the U.S. economy remains weak. Under those conditions, there would be no way the Federal Reserve would stop easing.

People applying for new unemployment benefits soared to 360,000. The metric used to indicate poor job growth is 350,000. Construction on new homes plummeted, dropping by 16.5 percent, the lowest level since November, 2012.

Probably most important was the Core CPI number, which moved up by a fractionally by 0.1 percent. Over the last year it has risen 1.7 percent. The CPI has risen only 1.1 percent over the last 12 months. The Fed has a goal of about 2 percent. This is going in the opposite direction the Fed has targeted.

This means the major goals of the Fed haven't taken root, and by its own declaration, it won't stop stimulating until the economy has legs of its own. We're far from being there when you consider the bad news was supposed to have been over. This is a fresh reminder of how fragile the U.S. economy actually is.

A survey of economists by Bloomberg sees the inflation rate missing the Fed's target going forward. They estimated it will climb to 1.5 percent in the fourth quarter of 2013 and 1.85 percent for the fourth quarter of 2014. If those figures are accurate, in over a year-and-a-half, the inflation rate still won't meet the Fed's targeted level.

All of this is to say unless the Fed is casting aside its stated goals, goals it has rigidly clung to, there is no way it's going to suddenly and unexpectedly stop easing. More than likely these "leaked" reports are a trial balloon to measure market response to the eventual end of loose money.

What that suggests, is under these conditions, it's likely the current market boom could last into 2015. That has nothing to do with the real condition of the economy, but the high probability the Fed will continue stimulating the U.S. economy until then.

What's Driving the Market?

As you already know, what's driving this booming stock market isn't real economic and sustainable growth, but the loose money policies of the Federal Reserve. That means the only question we need an answer is when the Fed will really start to ease. I think that has been successfully answered, and that means a ongoing boom through 2015, or at minimum to the latter part of 2014.

If the economy starts to sink before then, all bets are off as to when the Fed will take its foot off the pedal.

With the stock market rising precipitously, investors are starting to get nervous, fearing a bust, seeing that since November, 2012 the Dow has soared 22 percent.

Again, the stock market performance is solely based upon the easing policies of the Federal Reserve. If you don't believe that, think of what the response of the market would be to a quick end to easing. That should lay to rest any illusion it's based upon improvements in the economy, corporate revenues, or improving home sales.

This is because the Fed continues on with its policy of low interest rates. What that does is pressure investors out of historically safe vehicles like bonds and into real estate and stocks. Interest rates will remain very low, which means investors will continue to pour their capital into stocks and real estate.

The Fed has two basic mandates. It wants to lower unemployment and maintain stable prices. Its goal is to see the unemployment rate fall below 6.5 percent and for inflation to climb to 2 percent The idea the Fed will stop before successfully reaching those objectives is a stretch at best.

I continue to hit on this because a growing number in the media are reporting they have some type of prescient insight that the Fed is going to stop easing as early as fall of 2013. Only something drastic could make that happen, as was mentioned earlier. Don't let media reports change the Fed's stated goals and narrative: it will continue to stimulate until they are met. Hopefully you're convinced of that. This is totally a Fed-induced boom, and the central bank will in no way get in the way of it.

Some very temporary blips could happen in the markets if some investors believe the Fed will gradually move away from easing, resulting in a short-term self-fulfilling prophecy. Once it is discovered it's not going to be the case, the market will quickly roar back.

Investment Implications

This is a no-brainer if you don't attempt to over-analyze this. The data imply the numbers are only very slowly moving towards the Fed's objectives. Stimulus will continue. The conclusion is very obvious: investors need to continue to own and/or buy U.S. stocks. Its as simple as that.

For most investors, this means placing their money in an index fund of some sort. Below is a list of some of the best-performing U.S. equity funds for the year that should get a good look. Included is the performance of each fund over the last year and the top 10 holdings they have.

iShares MSCI USA Index Fund (NYSEARCA:EUSA)

The iShares MSCI USA Index Fund invests a minimum of 90 percent of its capital into in the securities of the underlying index or in depositary receipts representing securities in its underlying index. It tracks the performance of equity securities in the top 85 percent by market capitalization of equity securities listed on stock exchanges in the United States.

The market cap of the fund is $164.31 million, and is up 17.22 percent in 2013.

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iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT)

The iShares Core S&P Total U.S. Stock Market ETF has the goal of tracking the price and yield performance of the S&P Composite 1500. invests a minimum of 90 percent of its capital into in the securities of the underlying index or in depositary receipts representing securities in its underlying index.

ITOT has a market cap of $754.31 million, and is up 17.26 percent on the year.

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Vanguard Russell 1000 ETF (NASDAQ:VONE)

The Vanguard Russell 1000 ETF tracks the performance of large-capitalization stocks in the United States. Its underlying index is the Russell 1000 Index. The vast majority of the fund is invested in the stocks that make up the index.

VONE has a market cap of $209.77 million, and is up 17.42 percent in 2013.

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iShares Dow Jones US Index Fund (NYSEARCA:IYY)

The iShares Dow Jones US Index Fund invests over 90 percent of its assets in securities in the underlying Dow Jones U.S. Index and in depositary receipts representing securities of the underlying index. The underlying index is comprised of all of the companies in the Dow Jones Large-Cap Index, Dow Jones Mid-Cap Index and Dow Jones Small-Cap Index.

IYY has a market cap of $740.83 million, and is up 17.26 percent this year.

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Schwab U.S. Large-Cap ETF (NYSEARCA:SCHX)

The Schwab U.S. Large-Cap ETF tracks the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index. A minimum of 90 percent of its assets are invested in stocks included in the index. Up to 10 percent of its net assets may be invested in securities not in the index.

SCHX has a market cap of $1.54 billion, and is up 17.29 percent for the year.

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iShares Core S&P 500 ETF (NYSEARCA:IVV)

The iShares Core S&P 500 ETF invests a minimum of 90 percent of its assets in securities of the S&P 500 and in depositary receipts representing securities of the underlying index.

It has a market cap of $43.86 billion, and is up 17.17 percent so far this year.

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SPDR S&P 500 Trust (NYSEARCA:SPY)

The SPDR S&P 500 Trust of has the goal of producing results which correspond to the price and yield performance of the S&P 500 Index.

It has a market cap of $141.5 billion, and is up 17.13 percent on the year.

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Fidelity NASDAQ Composite Index Tracking Stock Fund (NASDAQ:ONEQ)

The Fidelity NASDAQ Composite Index Tracking Stock Fund pursues returns that correspond to the price and yield performance of the Nasdaq Composite Index. A minimum of 80 percent of its assets are usually invested in the common stocks included in the index. Securities are lent by the fund to generate income for the fund.

It has a market cap of $218.94 million, and is up 15.77 percent on the year.

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Schwab U.S. Broad Market ETF (NYSEARCA:SCHB)

The Schwab U.S. Broad Market ETF tracks the overall return of the Dow Jones U.S. Broad Stock Market Index. A minimum of 90 of its net assets is invested in stocks included in the index, which includes the 2,500 largest U.S. publicly traded companies which has readily available pricing information. Up to 10 percent of its net assets may be invested in securities not in the index.

It has a market cap of $1.97 billion, and is up 17.30 percent so far in 2013.

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Vanguard S&P 500 ETF (NYSEARCA:VOO)

The Vanguard S&P 500 ETF tracks the performance of the Standard & Poor's 500 Index. Almost all the net assets of the company is invested in stocks making up the index. Each stock is held in close proportion to how it is weighted in the underlying index.

The stock is up 17.20 percent so far in 2013.

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Small Cap Funds Doing Well

We're not going to get into the details of the small cap ETFs doing well this year, but here is a list of those that are worth looking into.

SPDR S&P 600 Small Cap ETF (NYSEARCA:SLY), up 17.10 percent; Vanguard Russell 2000 ETF (NASDAQ:VTWO), up 16.82 percent; PowerShares S&P SmallCap Information Technology Portfolio (NASDAQ:PSCT), up 13.76 percent; Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA), up 17.48 percent; WisdomTree SmallCap Earnings Fund (NYSEARCA:EES), up 16.82 percent; iShares Core S&P Small-Cap ETF (NYSEARCA:IJR), up 17.23 percent; PowerShares S&P SmallCap Health Care Portfolio (NASDAQ:PSCH), up 18.42 percent; Schwab International Small-Cap Equity ETF (NYSEARCA:SCHC), up 6.73 percent; iShares Russell 2000 Index Fund (NYSEARCA:IWM), up 16.78 percent; and the iShares Morningstar Small Core Index Fund (NYSEARCA:JKJ), up 18.64 percent.

Taken together, these 20 funds offer a good range to investigate and choose from.

Conclusion

With this market rally generated from the policy and actions of the Federal Reserve, the key metric to watch is when the central bank will in fact start to shrink its easing policy, and at what pace. From the data available, the goals of the Fed aren't close to being met, and that means the stimulus will remain in place and U.S. stocks will continue to move upward.

This is why concerns over a correction are unfounded, as there is nothing but speculation to suggest the Fed is ready to change course. There will of course be times when the market takes a breather, but it will continue to rise until the Fed actually does take action.

We can't confuse supposition and media reports with facts. Either the Fed is going to adhere to its stated objectives or not. With where the unemployment and interest numbers are now, it's hard to believe anything will change before the latter part of 2014 at the earliest.

The goals of the Fed aren't going to change, and neither is it going to adjust them and suddenly end stimulating the economy. Within those parameters, what will determine the timing of the end of easing will be the pace at which the objectives are moving toward their end.

Based upon that, we should have a minimum of a year-and-a-half of the U.S. stocks continuing to rise. Again, the risk will be if something disruptive happens that hastens the pace towards the stated goals of the Federal Reserve.

That's not hard to understand of follow, and success will be predicated upon whether or not investors believe some of the media stories suggesting easing is about to end, or if they believe the Fed itself and the mandate it operates under.

If you believe the Federal Reserve, then U.S. stocks are the place to put your capital.

There's nothing wrong with waiting for a pullback, but it must be understood that a major correction in U.S. equities while the Fed continues to stimulate is unlikely.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.