The Federal Reserve Open Market Committee (FOMC) acted as just about everyone expected, serving up a dovish dose of more of the same when it comes to monetary policy. The Fed kept its $85 billion per month quantitative easing (QE) program, while leaving interest rates unchanged.
The only thing different about this Fed meeting was the actual makeup of the FOMC. There are four new voting members on the committee — James Bullard, Eric Rosengren, Charles Evans and Esther George. The new voting members replace Jeffery Lacker, Sandra Pianalto, Dennis Lockhart and John Williams.
Interestingly, the makeup of the FOMC, in terms of members considered to be dovish vs. hawkish, hasn’t changed with the rotation. In fact, Esther George took over the Jeffrey Lacker role as the lone dissenter on keeping rates unchanged. George warned that the Fed’s policies are setting us up for inflation, which in my opinion is the single biggest no-brainer of the century.
All of the easy money provided by the Fed is at the root of the recent market surge to new five-year highs. The chart here of the S&P 500 Index tells the tale of a market on the rise over that period.
The Fed’s easy-money policies have been good for Wall Street. But in terms of the real economy, things haven’t been so great. Today’s news of the 0.1% decline in Q4 gross domestic product (GDP) tells me that the real economy is divorced from Wall Street. It also represents an ill canary in a potentially toxic coal mine for investors down the road.
The bottom line here is that stocks are, in my view, way too risky an investment at current levels, especially considering the anemic economic growth numbers here at home, and a relatively unimpressive Q4 earnings season that’s seen more than its share of poor reports.
As of last Friday, we had received results from 47% of the S&P 500 companies. According to a Goldman Sachs’ midterm Q4 earnings analysis, earnings so far are tracking about 6% below consensus estimates.
If the current trend continues, earnings in Q4 2012 will be about 1% better than they were in Q4 2011. That’s not much upside year over year, especially when you consider that Q4 2011 was when Europe was in a tailspin, and when central banks around the world were running to the rescue trying to stimulate us out of another meltdown.
So I ask you, can stocks keep powering higher if both GDP and earnings are contracting?
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
