It's Always About The Fed
We are not big fans of quantitative easing (QE), but a fair question is where would the markets, economy and employment be if the Fed had never printed money? The obsession with the Fed says QE matters to the markets; and what matters to the markets impacts the value of our portfolios. The next round of Fed input is Thursday's confirmation hearing for Janet Yellen, which is arguably the most important event for the markets this week. Mohamed A. El-Erian, of PIMCO, made the following points about what to expect Thursday in a CNBC article:
- Janet Yellen is qualified.
- Policy evolution rather than revolution.
- She values Fed's committee setup.
- She sees little conflict between regulation & stimulus.
- She does not consider Congressional inaction a deal breaker.
The markets focus on the short-term, and that is where the emphasis will be Thursday as Janet Yellen sits behind a tent card. What is El-Erian's take?
Look for Thursday's hearing to signal that, despite imperfect policy tools, the Fed is committed to keeping its foot on the accelerator even though outcomes may well continue to fall short of expectations, and even though the "costs and risks" are likely to rise. If it ends up making a mistake, something that it will try very hard to avoid, it would likely be one of excessive accommodation rather than premature tightening.
Investment Implications - Market Agrees With El-Erian
The financial markets seem to align with the "Fed is committed to keeping its foot on the accelerator" theory. The weekly S&P 500 (SPY) chart, as of 1:00 pm Wednesday, remains in a bullish uptrend.
The weekly chart of technology stocks continues to reflect a net win for bullish economic conviction relative to bearish economic conviction (the trend is up).
Our market model detected observable and positive changes in the market's risk-reward profile back on October 10. Until the evidence shifts in a meaningful and bearish manner, we will continue to hold our positions in U.S. stocks (VTI), technology (QQQ), energy (XLE), financials (XLF), small caps (IWM), foreign stocks (VEU), and emerging markets (EEM). As we noted on November 12, we would like to see some improvement in emerging markets. Should EEM remain weak, we may reduce our exposure for a second time before the markets close this Friday.