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Maybe You Can Beat the Federal Reserve After All
Daily Gains Letter publishes daily updates on personal finance, investment strategies and financial planning related topics.
I used to think that financial results and economic data were the backbone of Wall Street, but I think it’s safe to say that the most important force driving the markets today is the Federal Reserve.
Everything the markets have done since the Federal Reserve initiated its first round of quantitative easing back in 2008 is testament to this. After bottoming in early 2009, the Dow Jones Industrial Average has climbed almost 120%, while the S&P 500 is up more than 135%.
As this five-year period of unprecedented Federal Reserve-inspired money printing continues, unemployment remains high, home values are still 25% below their pre-market crash levels, wages are stagnant, and the number of Americans relying on food stamps has soared 80% to 47.5 million.
For further proof, just look at the actions of the last few weeks. On May 22, the Federal Reserve hinted it might start tapering off its $85.0 billion-per-month quantitative easing policy as early as Labor Day.
The global markets responded with a massive sell-off. Just the idea that the global economy could survive without the Federal Reserve’s cheap money supply and artificially low interest rates was a little too much to bear.
Then, on June 19, the Federal Reserve riled markets again when it came right out and said that thanks to the strong economy, it would consider tapering off its monthly $85.0-billion quantitative easing policy by the end of the year. It also said it could end its quantitative easing policies altogether in 2014. Again, the markets tanked.
Just how strong is the U.S. economy? During the first quarter, 78% of S&P 500 companies issued negative earnings-per-share guidance. During that time frame, the S&P 500 climbed 9.5%, while the Dow Jones Industrial Average advanced 11%. For the second quarter, nearly 80% of S&P 500 companies issued a negative outlook; during that same time period, the S&P 500 and Dow Jones both climbed about three percent.
That means there is an economic disconnect between what’s happening on Wall Street and what’s happening on Main Street. While the average American struggles, Wall Street cheers on the Federal Reserve.
While it’s true you can’t beat the Fed, eventually the Fed will have to take a step back. And when it does, Wall Street will be stuck having to look at actual economic data.
If the last few weeks have shown us anything, it’s that investors should be looking at corporate valuations, not just asset class. Looking at particular stocks with strong valuations can protect your retirement portfolio against sudden Federal Reserve-inspired shock.
Companies with strong valuations will react in step with the rest of the market, but thanks to strong underlying fundamentals, they should rebound much more quickly.
Three stocks that have been performing well since the beginning of the year—and in spite of the Federal Reserve—are health care provider Johnson & Johnson (NYSE/JNJ), Swiss financial services giant Credit Suisse Group AG (NYSE/CS), and Paris-based drug manufacturer Sanofi (NYSE/SNY).
For the most part, valuations in strong American companies have already been factored into the share prices. This is partially because of the U.S. being the first country to experience some sort of economic turnaround.
The European economy, on the other hand, is still very fragile, and a recovery has not yet been factored into many of the stronger European stocks. Looking for strong European companies with solid valuations could be an excellent way to find strong investments.
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Source: http://www.dailygainsletter.com/economy/maybe-you-can-beat-the-federal-reserve-after-all/1179/
