Thursday, December 13, 2012

Two Probable Good Results from Fed's Historic Action Yesterday ... (1) Stock Prices Should Rise and (2) There Will Be A Deal Reached Avoiding the Year End Fiscal Cliff

While the Fed can't actually cause stock prices to rise and while we don't really know that the politicians will strike a deal to avoid the fiscal cliff, it sure looks like that's the developing deal. And if that's what happens in the reasonably near future, that's a good thing.

Neither development would signal anything about the longer term, however, other than perhaps serving as a consumer and business confidence booster. But boosting the 'animal spirits' now instead of weakening them further would definitely be a good thing as well.

So all in all, what happend yesterday was a potentially very good thing for investors, consumers, businesses and the overall economy. About the only ones who will be hurt over the next couple of years at least will be fixed income investors, but we already knew that was the case.

First, the Fed's announcement yesterday about keeping interest rates low until unemployment falls to 6.5% and perhaps substantially lower than that was historic. See the preceding post "Breaking News: The Fed Ties Interest Rates to Unemployment Rate ..." and also Fed Ties Rates to Joblessness.

By declaring that it will continue to buy bonds and keep interest rates at historic lows until the unemployment rate falls to 6.5% or lower, the Fed clearly signaled that rates will remain low until perhaps near the end of the decade, barring an unexpected bout of inflation or an unforeseen resurgence in economic growth during the interim.

That's about how long it would take the unemployment rate to fall from its current level of 7.7% to close to 6.0% if new jobs were created at the rate of 200,000 per month. And of course, we're only generating about 150,000 jobs monthly currently.

The Fed has never tied unemployment directly to interest rate policy before, but that is what happened yesterday. With interest rates guaranteed to stay low indefinitely, the old "don't fight the fed" advice for stock investors suggests that the stock market should be a good place to be for the next few years at least. At least that's my assessment.

With cash dividends yielding 3% currently and bonds at less than 2%, that makes stocks over bonds pretty much a no-brainer.

Meanwhile, most of the signs are pointing to a deal on the fiscal cliff being reached as well. Such a compromise by the two political parties who have previously demonstrated zero ability to reach across the aisle to act in the best interests of the American public would do much to lift the spirits of investors and the confidence of businesses and consumers as well.

And in a just released poll, the public is sending a clear and unambigous signal to Washington that We the People don't want the politicians to take us over the cliff. See Poll: Strike a Cliff Deal Now.

My bet is that the politicians will respond accordingly and properly.

Thus, it looks like the confidence of the American people may get a much needed boost if the market continues to rise into year end and the fiscal cliff is avoided.

At least that's what seems to be unfolding and if my reading is accurate, it's going to be good for our country and our economy, too.

Of course, I could be wrong about believing that our politicians are capable of doing anything good for the nation, so we'll stay tuned. But for now, it looks promising.

Thanks. Bob.

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