Federal Reserve Chairman Jerome Powell made some significant
announcements at the Federal Reserve last week, but the news didn’t gain much
traction in the financial media. For one, most people do not find “Fed-speak” that
invigorating, or even interesting. But secondly, Powell’s pronouncements did
not have any immediate impact or implications, as he was setting a course for Fed
policy going forward. Market watchers
mostly shrugged.
If you’re a short-term trader (which I generally do not
advocate doing), this news probably does not have much meaningful impact. But for
longer-term investors, I see a few key takeaways – and they’re all good for
stocks.
First, a quick overview as to what the announcement means
for Fed policy and possibly the economy. Chairman Powell indicated the Fed
would be implementing a “flexible form of average inflation targeting,” which
is a convoluted way of saying that the Fed will pursue an average 2% (or more) inflation
target over time. Because the 2% target has been elusive so far, the underlying
implication is that the Fed is now increasingly willing to allow inflation to
drift above 2% for “some time,” given that inflation has been running under
that target for such a sustained period.1
A big takeaway I see: even if inflation ticks above 2% and
the unemployment rate drops back down to pre-pandemic levels, the Fed is still going to continue on with its
accommodative monetary policy – which now includes asset purchases and interest
rates at or near the zero bound. For investors, this means that “lower for
longer” interest rates have basically been codified into Federal Reserve
policy.
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What’s ‘Fair Value’ on the S&P500?
Setting U.S. returns expectations for the remainder of
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What should you think about COVID19 era jobs data?
An update on U.S. fiscal stimulus
Zacks Rank S&P 500 sector picks
Status of global energy markets
And much more
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In my view, this pronouncement is not-so-good news for
savers and fixed income investors, but it could be great news for equity
investors and borrowers.
When it comes to the flow of capital, low interest rates tend
to nudge investors into stocks, which is especially true in the current
environment. Since the yield on the S&P 500 is materially higher than the risk-free
yield on U.S. Treasuries, investors have been increasingly moving further out
onto the risk curve to own stocks and capture yield. In many cases, too, the
dividend yield on large or mega cap stocks often far exceeds what one can get
from low risk bonds. For income-seeking retirees, this often means owning a
higher percentage of stocks versus bonds.
Chairman Powell effectively said that no rate increases or
slowdown in asset purchases would happen unless certain inflation and
employment conditions were met, and today the U.S. economy is far from meeting those
conditions. These changes bring the Fed back to the 1940’s, when Fed leaders
were overwhelmingly focused on growing the labor market, and it also marks an
end to the inflation-focused Fed of the 1970s. We can expect easy monetary
policy for years to come, in my view, and that’s generally good news for
stocks.
As far as the economy is concerned, interest rates are
already at the zero bound, and the Fed is already engaged in asset purchases. So,
there’s really no new stimulus here. But in my view, it is meaningful to send
the message to consumers, investors, and businesses that policy will remain
accommodative for a longer period of time. In a sense, that’s another form of
stimulus: money is cheap and will remain so for some time.
Bottom Line for
Investors
There’s an old saying that investors should not “fight the
Fed,” which is a mantra I think applies today and also over the medium-term. Even
without the Fed announcement, I could make a case for owning equities now based
on a nascent economic recovery and expected earnings growth over the next 12
months. But if low interest rates are also a known quantity, I think it makes
the case for owning stocks even stronger. The Fed just made “lower for longer”
a known quantity.
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This report not only looks at Tech but highlights several factors that are producing 2020 optimism right now and contains some of our key forecasts to consider such as:
What’s ‘Fair Value’ on the S&P500?
Setting U.S. returns expectations for the remainder of
2020
What should you think about COVID19 era jobs data?
An update on U.S. fiscal stimulus
Zacks Rank S&P 500 sector picks
Status of global energy markets
And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!4
1 The Wall Street Journal, August 30, 2020. https://www.wsj.com/articles/the-fed-lays-out-new-goals-but-its-tools-could-be-lacking-11598796001
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Federal Reserve Bank of New York, Effective Federal Funds Rate [EFFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EFFR, September 1, 2020.
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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