Doves 1 — Hawks 0

This title has to do with the decision last Wednesday – one almost totally unexpected by the majority of economists, media outlets and traders – by the Fed’s Open Market Committee to do nothing about their asset purchase program. Doves are those who feel that the maintaining/continuing the program is the best way to help the economy. Hawks are those who feel that the economy is strong enough now to support cutting back the amount of purchases the Fed is making.

The Fed’s announcement stated that its “pace of asset purchases was not on a preset course.” And,. in his press conference after the announcement, Mr. Bernanke responded to media questions about the lack of action by saying that he didn’t “recall stating that we would do any particular thing at this meeting.”

Perhaps not, but it was called an “incredibly wimpy” decision by David Kelly, Morgan Stanley’s chief market strategist for its lack of clarity.

Tough week for traders

Traders are individuals who typically make their money on very short-term movements. These are the folks who rely on headlines and whispers and announcements to create enough market fluctuation to allow them to profit from that move…assuming, of course, they’re on the right side of it.

As noted above, the conventional wisdom was that a small tapering would be the result of the Fed’s meeting. When that didn’t happen, it blindsided most of the traders, causing them to lose money on what had been seen to be “sure things.” They’re mad at the Fed. They say the Fed didn’t communicate its intentions clearly enough; an obligation the Fed doesn’t have, by the way. I think Matthew Hornbach, the interest rate strategist at Morgan Stanley, stated it best…”The Fed does not pander to market expectations.”

The reality is that the traders misread the Fed. They thought that, even though the economic data wasn’t quite up to the levels the Fed had previously said they should be, it was good enough to warrant a tapering and so set their trades up accordingly. So, it’s the Fed’s fault – not their own – that they lost money. Such logic makes sense to anyone with children…

What these folks really want is for the Fed to tell them exactly what their intentions are over the coming months. Talk about Mission Impossible. There are way too many moving parts which are subject to way too many changes for that to ever become a reality – I don’t care who the chair is.

Market action

Most market participants thought the lack of tapering now was a positive, sending the Dow and S&P500 each to new all-time highs on Wednesday and the NASDAQ to its best result in 13 years.(1) They think that the Fed’s easing will continue to drive assets into more (relatively) risky assets, aka, stocks, and keep the market rising. Many also seem to think that, without the easing support, the air will come out of the market balloon and down we’ll go. (I definitely disagree.)

That thinking was evidenced on Friday when one of the Fed’s 12 District Presidents spoke.

Mr. James Bullard, President of the St. Louis Federal Reserve Bank, said that the tapering decision had been “close”. He then also mentioned that – in his opinion (key word) – the Fed could start the tapering process at its next meeting in October. Well, traders apparently heard could as would and immediately decided that the easy money would now not be continuing. The result was that the markets dropped as they all bailed.

When the dust settled, all the gains made on Wednesday were given back on Friday. And gold and silver, which had run back up earlier in the week, also gave back all they had made – and more – with both off 20% from year-end.(2)

Nonetheless, after all the gyrations, the three major indicators (Dow; S&P500 and NASDAQ) each ended the week with gains and each remains up very nicely for the month, quarter and year-to-date.(3)

Also, with the Fed holding its position for now, bond yields should steady. So bond fund prices, while not rising, won’t likely be dropping n the meantime.

Bubblicious?

Some think the stock market is in bubble territory today. I guess just because it hasn’t dropped or, as mentioned above, due to the Fed pumping it up. You may not be surprised to find that I disagree.

Think about where we were a year ago, in terms of market environment – you know, when the world as we knew it was about to end…again. Today’s sort of vague fear that our market may drop was totally overshadowed by the ongoing Euro-drama. Remember?

The euro currency was soon to be wall paper. One – or more – of the following, Portugal, Italy, Greece or Spain was going to blow up and take the world economy with it. That stuff. Major worries. Hourly headlines. Film at 11 – all of that.

Well, it didn’t happen and the fear that all that going on had put into the markets and individuals is totally in the rearview. Folks are starting to actually look forward again and market fundamentals, with the exception of this past week’s excitement perhaps, are again becoming the focus. Cyclical sectors are positioned to be the beneficiaries of our continued economic recovery.

Long-term investors should look at how the market reacts in the face of news events only as an indication of how people are feeling about those things just at that moment. The trends, the underlying strengths in today’s world –these are the things that drive your asset values.

Like always, having quality investments in a well-diversified, properly allocated asset base to meet your particular needs will take care of you. Holding to them while watching the market entertain you each day and not responding to the story du jour is a good thing…

Cheers!

Mike

509-747-3323

(1) CNBC, 20 Sep 2013

(2) CNBC, 31 Dec 2012

(3) CNBC, 20 Sep 2013

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http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx

Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.

Michael J. Maehl, CWM®

Senior Vice President

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