…And a Taper in a Pear Tree!

The economy, politics and the markets don’t always combine to work for the best interests of investors. However, during this past week, in addition to new all-time highs being created with the Dow and S&P, events and announcements from each of these sectors combined to provide us a great positive environment within which we can enjoy our special holiday time even more.

The Fed

The biggest event was the announcement Tuesday by the Federal Reserve that, well ahead of the time when most had expected it, they will begin tapering back their monthly bond purchases by $10 billon starting in January. The Fed had also said previously they wouldn’t begin tapering until unemployment was lower and the economy was stronger. This tapering, to me, is a good vote of confidence in the economy by the central bank.

Having made the announcement now took away a huge amount of the uncertainty that’s been hanging over the markets since last May when Mr. Bernanke first suggested that a tapering would take place.

Personally, it’s very gratifying to see such a positive market reaction to the news. It seemed to discredit the idea that without QE, the market would sell off because it “couldn’t possibly keep going up without it.” Having had the market continue to rise in the sessions immediately after the report – after the traders and money managers had their opportunity to analyze it – was a further reinforcement that QE did/does not equate with market success.

The Fed also said that short-term interest rates would remain quite low for some unspecified time. In other words, the bank would not be tightening. What this told the markets is that, even though the economic training wheels are coming off, the bank will still be there to provide us support.

I think it was a great move…a little bit of tapering so the market can function on its own. In addition, tightening would be controlled so that rates won’t rise too much too soon as to be too competitive with stocks. That would have created a drag on the stock market.

The economy

Friday’s final revision of the third quarter GDP by the Department of Commerce certainly helped make the Fed’s case. The real GDP growth for the quarter was revised strongly higher to 4.18 %.(1) Most excellent! We also learned that both business and individual spending was revised higher. In other words, the economic recovery is being led by real people actually buying real stuff.

Other examples of our improving economic strength include the continued ramping-up of the housing industry, such as housing starts rising to the highest level in nearly six years; car and light truck manufacturing volumes continuing to grow and unemployment levels steadily moving lower.

Politics

Let’s see. So far this year, we had the fiscal cliff to deal with. We also had the debt ceiling “debate”, the sequester, the government shutdown and other politically-driven events which were all going to throw the economy and markets back down the dark hole of 2008 – or so was guaranteed by various and sundry at the time..

Well, these faux crises were dealt with and the market drove on. And now, we’ve had the House and Senate actually agree to a budget…something for reasons only understood by them that they hadn’t been able to accomplish for a number of years previously. While this was a footnote to the Fed’s actions, the fact that this happened also removed more uncertainty from the markets.

Your present

From my point of view, we have set ourselves up nicely for both a solid ending to the year and a good base from which to launch the economy and the markets into the new one.

We have low inflation, low interest rates, improving corporate earnings, a currently benign geopolitical situation and a widely and consistently expanding global economy…bringing with it all the challenges and opportunities of an expansion.

So, imagine that these thoughts are presents for you to help shape your new year investing strategy.

In general, globalization isn’t slowing down. Tech will continue to create jobs for the educated.  A global middle-class is just starting to grow. Populations all around the world will continue to expand. This leads to more consumers of all manner of products and services.

Enjoy the bounty and benefits that all this combines to provide you. When you consider the sheer scale of our potential here, how can you be anything but positive for the long-term?

Enjoy your most wonderful Christmas!

Cheers!

Mike

509-747-3323

(1)  Commerce Department, 17 Dec 2013

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