Elections went fairly close to plan with the GOP capturing Congress and gaining ground in the Senate. Today we face the FOMC meeting results relative to QE2 and the plan looking forward. No big surprises expected from the Fed as the meeting concludes today. The major news events have not produced any major concerns to this point and we can hopefully look towards the balance of the year and into the first quarter.
The election was a mandate on the economy and putting Americans back to work. How this happens will be the primary debate in Washington. Being pro business would be a start, specifically small business. Cleaning up regulations that impact the small business owner will be an important part of the efforts. Businesses will start hiring if they have clarity on issues such as healthcare and taxes. The states will have to deal with the unemployment tax deficits and the rate increases being proposed. The election was the easy part, implementation of effective legislation and providing clarity for business will be the challenge moving forward.
The dollar is another area in dire need of attention. No country in history has ever devalued its way to prosperity. The US cannot continue to trash the dollar and expect to benefit long term. We need to cut spending at the federal and state level to regain confidence in the greenback. The biggest challenge is a Fed that believes it needs to print more money and increase money supply (QE2). Since they announced this effort on August 27th the dollar has declined 8%. We need a concentrated effort to support the dollar from the Fed and Treasury. The dollar index is currently at 76.74 and back at near term support. Some help from the Fed with defined clarity relative to the dollar would help today.
Commodities are on the rise and part of the reason is the dollar's decline. Since we have addressed that issue the other side of this equation is demand. Recent data shows that China is still on a path of 8-10% growth. With that comes demand which has been steady and rising. As the global economies return to health, the demand will continue to rise, putting further pressure on prices. This is a sector that offers opportunities now and going forward. DBC, PowerShares Commodity Index Tracking ETF, DBA, PowerShares Agriculture ETF, and DBB, PowerShares Base Metals ETF are all ways to capture the move higher in commodities.
Healthcare reform is not going to be reversed, but modifications are likely. This offers opportunities as well. XLV, SPDRs Healthcare ETF is a diversified way to take advantage of the changes benefiting the sector. The tax on medical devices could be eliminated benefiting these stocks. IHI, iShares Medical Devices ETF would be worth watching in conjunction with any changes. Pharmaceutical stocks could equally benefit from changes and XPH, SPDRs Pharmaceuticals ETF is worth adding to your watch list as well.
Housing remains a heated debate relative to foreclosures and financing. The faster this issue is resolved the better. There are no simple solutions to the legal arguments relative to foreclosures and if anything this will stall the recovery in the housing sector. That said, the homebuilders are still on my watch list. They are cleaning up their balance sheets and finding ways to build profitably, albeit less than in the past, but the earnings are picking up and should continue to do so moving forward. Creating private lending outlets, i.e. banks, REITs or MLPs would be beneficial to the process and there is hope of that on the horizon. The rumor of Lennar (LEN) being acquired pushed the sector higher and I would expect more positive than negative from the sector moving forward. XHB, SPDR Homebuilders ETF, is attempting to break from the recent trading range.
The market has reached the April high and the questions relative to the ability to continue higher linger. Part of the answer is in the sectors and items discussed above, the other is in the ability to expand economic growth. The old adage that less is more, may be what we need from the Federal Reserve, Washington (federal government) and the state governments. Less government expansion, eliminate or at least lessen deficit spending and less strangling regulations will be a start. There are opportunities, the issue is capitalizing on the momentum.
Disclosure: No positions