Fed Stimulus Cuts Having Little Impact on Stocks

No matter what your investment bias (bullish or bearish) it is hard to deny that we are entering into uncharted territory for the economy. The US central bank, the Federal Reserve, has made its policy intentions clear and there is little reason to believe that their historic quantitative easing programs (QE) will still be running at the same time next year. From an investment perspective, this would normally be viewed as a negative given the fact that an environment without monetary stimulus from a central bank is one where it is usually more difficult for companies to outperform in their quarterly earnings results.

But when we look at the performance in stocks so far this year, a different scenario has emerged. Both the S&P 500 and the Dow Jones Industrials continue to post new record highs and we have not even seen many examples of profit taking in either of these indices even though there is good potential to capture gains at their current levels. Essentially, what this means is that most investors are confident enough in the economic to continue building positions in equity markets. This also means that the stated intentions of voting members at the US Federal Reserve are having limited impact in derailing the broader expectations for where stock valuations are headed next.

Improving Economic Data

What could be explaining these trends? “Of course, it is difficult to pinpoint a single answer as there are many individual factors that work in unison to create the larger macroeconomic framework,” said Jane Wyman, markets analyst at Orbex. But one reason that is pretty clear at this stage is the fact that economic data has been improving and that the labor market is stronger now than it has been in years. This creates a significant support for assets like the SPDR S&P 500 Trust ETF (SPY), the PowerShares QQQ Trust ETF (QQQ), and the SPDR Dow Jones Industrial Average ETF (DIA). But this is not true for all asset classes, as there are clear areas that are hurt by this type of activity.

Some examples here include safe haven assets, in areas like precious metals and in the US Dollar. This means that the SPDR Gold Trust ETF (GLD), the iShares Silver Trust ETF (SLV) and the PowerShares DB US Dollar Index Bullish ETF (UUP). These assets tend to move in opposite directions, so what is positive for one tends to be negative for the other. Of course, it will be important to watch the individual results that are seen in individual companies. It never makes sense to buy an asset based only on the broader trend, as there are individual factors that could prevent the asset from participating in that trend. But examples of strong results can still be found. Companies like Apple, Inc. (AAPL) show a clear example of this but there are plenty of other choices that can be found, as well.