Uncertainty on Bernanke Is a Sell Signal for Stocks

Includes: AIG, DIA, GS, QQQ, SPY, VTI
by: Arnold Landy

As the outlook for Federal Reserve Chairman Ben Bernanke's confirmation for a second term turns uncertain, I am pressing the "PAUSE" button on my bullish outlook for stocks, which I had maintained stubbornly for over a year. I have reduced greatly the allocation to stocks in clients' portfolios in recent days. The economic recovery does remain on track, in my opinion, but doubts regarding Mr. Bernanke's confirmation by the Senate raise a red flag.

One may quibble over whether the Fed should have bailed out AIG (NYSE:AIG) or supported large investment banking companies, like Goldman Sachs (NYSE:GS), but I give Bernanke a pass if he made a few mistakes, possibly, while making rapid-fire decisions which averted the Great Depression Round II. Under his stewardship, Fed innovations stabilized the banking system. And the Fed's cautiously stimulative monetary policy will enable the business cycle to continue its natural path, moving from recession to sustained growth, with little inflation.

But the stock market is another story. The removal of Bernanke could easily darken the bright light at the end of the economic tunnel that has drawn investors along the track to higher and higher stock prices. If Bernanke's nomination for reappointment is confirmed by the Senate, I will consider raising stock holdings to near 100% of client portfolios, again. However, any changing of the guard at the Fed will make for a shaky stock market and I will await signs of stabilization in stock prices or further improvement in economic indicators before committing more capital to stocks.

Disclosure: No positions in stocks mentioned