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Tuesday, 16 November 2010 13:54

Some Thoughts

Through Friday, November 5, the stock market, as defined by the Standard & Poor's 500 Index, is up 11.8% year to date. Almost eighty percent of this performance came in the prior three months, as investors anticipated election results favorable to greater fiscal responsibility and more accommodating taxpayers, individuals and businesses alike. Typically, when anticipation turns to reality, there is a "buy on the rumor, sell on the news" posture that would have the market lower after the results of the election, but the Federal Reserve changed the rules by outlining QE II, otherwise known as the second round of quantitative easing. With the Fed committing to purchase $75 billion of Treasury notes and bonds per month for eight months, the expectation is for intermediate to long-term rates to fall, thus an easing in interest rates. The fed assumes lower rates of entice businesses to expand, which will lead to hiring and training new employees, thus reducing what is becoming a persistently high unemployment rate. Another expected benefit of lower rates is a falling US dollar, thus making US exports more attractive in global markets. In promoting the Fed's plan, one stated and notable desire of QE II is to foster a higher US stock market, which Wall Street immediately took note of by rallying the Dow Jones Industrial Average over 200 points the day after the announcment. Even before QE II, the Fed had aggressively taken measures to stimulate the economy. How it unwinds is yet to be understood, but the landscape created from this is quite favorable for the US equity investor. With yields near zero and expected to be there for many months into the future, US stocks are inexpensive, especially those paying dividends. The Wilshire 5000, the broad market US index, has risen ten straight weeks, The best showing since 1992, and two away from a record twelve weeks set in in 1985. Should the market take a breather? Perhaps. Is there a wall of worries to climb? Definitely. Given the current backdrop and duration the Fed is telegraphing, however, the overall market outlook appears positive.
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