S&P 500: The Fed Needs Us To Buy Stocks, Not Sell Them

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June 24, 2013 10:58am NYSE:DIA NYSE:SPY

buy-nowBillionaires Portfolio: The media does a very poor job of interpreting financial and economic data, and telling the story.  In most part, they do a poor job because they have poorly aligned incentives.  They need eyeballs to make money.


As such, they continuously try to find ways to create “shock value.”  That can affect your psychology as an investor.  And that can create a barrier to making money as an investor.

That’s exactly what we’ve seen throughout the crisis that has resulting in the masses losing money early on, and then losing even more money throughout.  And mis-information is exactly what we’ve seen this week.  After Bernanke spoke on Wednesday, both Bloomberg and MarketWatch immediately ran headlines that said the Fed was ready to taper by end of year.  Untrue!

First, the Fed said nothing different in its prepared statement this past week.  They stayed the course.  But, in Bernanke’s speech, he laid out a scenario where the Fed would reduce its purchases and perhaps even end QE.

But there is a huge caveat that waters down the “shock value” for journalists.

For the Fed to dial down its QE, they would first need to see their VERY optimistic projections about the economy achieved.

To be precise, they think that unemployment will go from 7.6% to 7.2-7.3% by end of the year.  IF it does, they may reduce the size of their current QE program.  And IF their projections by mid-year 2014 are right, they may end this third round of QE all together.  Their projection of unemployment at that stage would be 7%.  (We should note that the Fed has been overly optimistic and largely wrong on economic projections throughout the crisis).

Now, it’s important to understand, these are VERY aggressive projections about the economy.  For the most part, throughout the duration of QE3 unemployment has gone sideways – in the mid 7 percent area.  Now, all of the sudden, they expect dramatic improvement in the coming months.

That’s great!

Does it mean the Fed is going to reduce QE?  No!  Does it mean they will IF their optimistic economic projections come true.  Yes, likely!

Guess what?  An aggressively improving economy is highly positive for stocks!  It’s not negative!  Economic shock is the “risk” that has overhung the stock market (NYSEARCA:SPY) for years.  QE has served to quell that risk.  Guess what else quells that “shock” risk?  A dramatically improving economy.

That means, investors will look at the valuation of the stock market, relative to its historical average valuation (usually a P/E multiple) and they will find great value in buying stocks.

But the media likes fear.  It gets eyeballs and generates advertising dollars.  So they have painted a scenario where reduced QE means a stock market crash.  That could not be further from the truth.  People that make money in stocks, use these mis-interpretations by the broader market as a gift to BUY, not sell.

And that’s precisely what sophisticated investors are doing.

Now, the real topic the media should be covering:  Why is the Fed so optimistic about the economy all of the sudden?

It’s all about Japan (NYSEARCA:EWJ).  In a research note to my clients, prior to the Fed meeting, I said “IF the Fed does decide to ‘taper’ its current bond buying program earlier than they previously indicated, it’s a flashing message that the Fed thinks the impact of Japan’s (inflation-seeking) policies are going to pack a punch – enough so, that they could be concerned that the positive economic impact in the U.S. could be sharp enough eliminate the need for their QE program all together.”

Again, understand the Bernanke (the Fed) has committed trillions of dollars toward keeping the U.S. economy afloat in recent years, and has a vested interest in keeping stock values high and house prices on an upward trajectory.  They would do nothing to jeopardize that.

Remember, the rest of the world continues to be early into a second wave of monetary easing – not tightening.  That underpins the very dynamic that the Fed is hoping for – creating an environment where people are willing to take more risk, spend money and invest money.

Unfortunately, many of you can be influenced by the drama on CNBC or from scanning the headlines on the Wall Street Journal.  With that, we know that some of your perceptions about the stock market are influenced.  So today, I wanted to make sure you understand what the Fed REALLY said.  And what the real backdrop is for the economy and the stock market (NYSEARCA:SPY).

Recall that throughout the past nine months, the stock market has risen nearly 20% (and our Billionaire’s Portfolio has risen as much as 30% during the period) all while the media was telling you to panic about one event or another.  And sadly, many that hold themselves out to be investing professionals have been educated by watching CNBC and reading the opinions of journalists.  We’ve told you along the way not to succumb to the bad information.  If you have listened, well done!

With the potential for more global monetary stimulus to come next month, from the BOE and ECB, keep perspective on this (June) consolidation period for stocks.  And we are given a gift to now buy against the prior all-time highs of 1576 in the S&P 500 Index (INDEXSP:.INX).

william meadeWritten By William Meade From The Billionaires Portfolio

William Meade is the President of Pure Alpha Research, a hedge fund consulting and investment research firm. He is the former Director of Research at Zacks Investment Research in Chicago. Before that, he was the lead analyst at a top performing $1.2 Billion dollar institutional investment firm and hedge fund. Mr. Meade has a Masters in Applied Economics from The Johns Hopkins University. Learn more about William Meade and how he follows Billionaire Investors into stocks by visiting the Billionaires Portfolio.


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