2013 has gotten off to a wonderful start for equity investors. After what must be one of the luckiest years on record in 2012, the S&P 500 continued the ride up more than 7 percent year to-date, and then the Fed had to go and ruin the party. The minutes of the last meeting of the Federal Reserve’s Open Market Committee came out Wednesday, and shockingly to some traders it showed that a few of the committee members are concerned with the long-term ramifications of the Fed continuing to purchase bonds in their effort to keep interest rates low. Of course in typical overreaction style some pundits are saying this means all of the Fed’s “easing” will soon come to an end.
It should be seen as a positive that at least some at the Fed are concerned with the possible ramifications of these unprecedented actions. I want to make it clear that we are not among the fear mongers who think this money printing binge will destroy civilization as we know it. My family does not have, nor do we plan on building, a shelter with years’ worth of nonperishable food and tanks of clean water, let alone an arsenal to protect us when government collapses. However, just because the Fed is not causing the end of the world does not mean that its activities are completely benign. The Fed, in its attempt to keep us from falling into a deflationary spiral, has pulled out all of the stops and is in uncharted waters. As I have said before, Bernanke is a student of the Great Depression and is absolutely determined not to make the same mistakes that our central bank made during that crisis. As a result he is making all new mistakes. It should be much more concerning to market participants if no one at the Fed were concerned.
The mere fact that some of the committee members express thoughtful concern does not in and of itself mean that the Fed will slow the presses any time soon. After all, they expressed concern right before voting to stay the course. The Fed will not slow down its activity until there are actual signs of sustained improvement in the economy or real signs that its policies are beginning to cause harm. Neither of those cases can be made in any convincing manner at this time, so one should expect that the Fed will stay the course for the foreseeable future.
What the Fed minutes really did was provide an excuse. Traders have been itching to take profits and cause a pullback. It is healthy for the market to pull back every once in a while, and it had been on a long run beginning late in the year last year through the first six weeks of 2013. This may be the beginning of the pullback or the pullback may come later, but it will come. We expect at worst a 10 percent correction, and then the market should continue its upward climb into new highs. Remember every time the news talks about record highs all that means is that the market is back to where it was in 2007, which is when it finally got back to where it had been in 2000 – but that is an entirely different Insight.
Chuck Osborne, CFA
Managing Director
