We have a little more clarity from the Federal Reserve. The statement it released on April 24 was very similar to recent ones, although it bumped up the inflation topic just a bit. That is ironic to me since the Fed has suggested that equity price stability and job growth is far more important to it than inflation data. My opinion is that the Fed could possibly be creating inflation.
I say possibly, because one of two things will happen. One, the economy will continue to strengthen and thus other economies around the world will strengthen and there will be an increase in demand for goods and services. Since the Fed has told us that it expects rates to stay low through most of 2014, all of the goods that we import will probably become more expensive. This is the definition of inflation.
Two, the economy starts to sputter. We have seen signs of this in the most recent two durable goods reports. We have also seen data underperform on the jobs front. If the data sputters enough and the Federal Reserve (as well as other central banks around the world) and its stimulus packages don't have the same effect, we could have deflation or stagflation -- where prices and economic growth go sideways or down.
I am not sure what will happen, but as a trader and an investor, I look to trade and invest successfully through any market -- up, down, or sideways. In my most recent article on Seeking Alpha, I talked about economic data dampening the mood. Well, as we can see, the mood is far from dampened. The markets have moved from 1360 in the SPX to 1400 in four trading days. If you look back at recent data, every time the Federal Reserve speaks, the markets rally. Once the markets have a chance to tabulate why they rallied, they go sideways. How long will the Fed be able to save the day?
In the article referenced above, I talked about your portfolio and finding quality, dividend paying stocks. I still believe that, but wanted to add something to it. I want to bring in the idea of cyclicality. Not only do I want to look for quality stocks providing dividends, but I also want to find stocks that may be a little more defensive if the stock market is "overvalued" and the efforts of the Federal Reserve start to lose their affect. I am talking about companies that everyone uses every single day, ones such as Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), and Yum Brands (NYSE:YUM).
Yum is an interesting company as it is expanding internationally at a very fast pace. That could work for or against it, depending on any global market correction and what happens with cyclicality among developed, developing and emerging markets. But what I like is its price point. You are familiar with Yum as it is the parent company of Pizza Hut, Kentucky Fried Chicken, and Taco Bell. I have a feeling that if markets correct in the U.S. (and if that happens, then globally), Yum is somewhat "price protected" from a declining economy. Think about Yum's products vs. a company like Best Buy (NYSE:BBY) that sells electronics -- which one is more of a consumer "necessity"? Yum also comes with a yield of 4.3%.
In conclusion, as the markets try to work higher and higher, an investor has to look at the fundamental reasons why we are moving higher. Investors also should take into account risk/reward just as a trader should. Using a little bit of "micro" fundamental analysis, where you look at a stock and its product and how it would fare in varying market cycles, adds value to your investment decision.Disclosure:
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.