Thursday, May 1, 2014

Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

Three seemingly contradictory things happened on Wednesday: As the Muppets used to sing on Sesame Street: "One of these things is not like the other." If economic growth looks bad, and the Fed tapers QE (to a mere $45 billion a month), why does the Dow take heart? "People have been more confused this year, and during periods of confusion people sometimes flock into names that are a little bit more secure and a little safer," explained one portfolio manager to the Journal.

Honestly, I'm confused myself, and I don't have to figure it out for a living, but I wonder if the Fed's actions effectively force investors to remain in stocks. After all, if Yellen & Co. are pulling back on their bond buys, one would expect long-term rates to rise, handing capital losses to bond portfolios. On the other hand, the FOMC continues its commitment to maintaining the lowest possible short-term rates, so you can't earn anything on your cash. Of course, everyone knew this already, but perhaps the Fed's restatement of the obvious helped to inject a little more certainly amidst the confusion, enhancing the bias toward equities.

So, while for investors, something (stock gains) is better than nothing (bond yields), for the stock market nothing (Fed policy) is better than something (low economic growth).

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