With the Federal Reserve green-lighting the stock market’s recent advance, it’s a reminder that equities continue to be guided by central bankers and not economic reality.
Fed’s Accommodative Actions Guarantee Return for Stock Investors?
But this is how it always is in a secondary market (stocks). Share prices reflect the perception of a multitude of forces (the Federal Reserve’s actions included), with earnings growth a secondary issue in recent history, along with Main Street incomes.
The Federal Reserve is getting closer to effecting a new interest rate cycle, but it’s well educated on how its policy affects capital markets. It knows full well how the stronger U.S. dollar is hitting corporate results.
If there is certainty in this market, it’s that the Federal Reserve remains as friendly to capital markets as ever. With this backdrop, I think it’s reasonable to expect a modestly positive return from equities once again this year.
The outlook for corporate earnings is diminishing this year, but a lot of large-cap, brand-name companies are seeing estimates ticking nicely higher for 2016.
With the prospect of a new interest rate cycle by the Federal Reserve, many utility stocks recently experienced their own correction. This is normal in the face of rising rates, and the sector as a whole has done well as of late. Dividend yields among many utility companies are quite attractive currently, but valuations continue to be on the high side.
This market is fully priced, but there really isn’t much else for institutional investors to consider. The Federal Reserve continues to make it palatable to buy stocks among all the asset classes in secondary markets.
Stock Markets Push Higher as Central Bank Considers Interest Rate Hike
The Russell 2000 Index just pushed a brand new record-high; so did the NASDAQ Biotechnology Index, which has almost quadrupled over the last four years. The NASDAQ Composite also broke a new multiyear high and should soon be higher than it was during the 2000 technology bubble.
The Dow Jones Transportation Average remains in consolidation; its leading performance looks to be diminishing compared to other major indices.
This development is perfectly normal as a secular bull market matures. A lot of good news is already priced into transportation stocks, including lower fuel costs, higher freight volumes, and stronger revenue passenger miles among airlines.
The Federal Reserve continues to have the stock market’s back, and while the first rate increase will no doubt result in short-term market selling, I suspect sentiment will view it as a net positive on the U.S. economy and for stocks.
So this is very much a stay-the-course type of market, especially among investment-grade equities. (See “Four Top Stock Groups for Your Investment Portfolio in 2015.”) Corporate balance sheets remain in very good condition and the cost of capital, even in the face of higher rates, is still very affordable.
For stocks, this remains a Federal Reserve-inspired market, as it has been for the last several years. While it’s been another tough start to the year and interest rates are expected to soon tick higher, the secular bull market remains intact.