Monday, September 17, 2012

If the Fed Wants You To Buy Stocks, Should You Listen?

Merrill Lynch strategist Savita Subramanian is out today with a nice summary of where we stand in the markets (I added the emphasis):

Equity sentiment has hit 27-year lows, and the S&P 500 is now trading at the widest discount to bonds that we have seen in the history of our data. But the market has trended up for most of the year, and the recent rally on dovish comments from the Fed puts the S&P 500 up by 16% for 2012. Despite demonstrable underperformance of bonds and cash for most of the year, outflows from equities into bonds have been the dominant trend, and only recently have we seen this reverse course.  
It would not be surprising to me to see the markets have a pullback in here after such a strong run in recent weeks.
But the tape still trends positive, and the Fed is doing everything it can to make staying in cash a very expensive proposition.
Writing in the London Telegraph, columnist Tom Stevenson wrote a good piece about how investors should be positioned.
His bottom line:  buy stocks, but favor those with healthy dividends.
Stevenson notes that the Fed's actions will eventually lead to more inflation (the rise in longer term bond yields last week already anticipates higher inflation rates) but this may not occur for several years to come.
Stevenson compares the current period of financial repression to the post World War II period:

...investors should continue to favour income-generating investments. The whole point of QE is to suppress bond yields and to keep the real, inflation-adjusted cost of servicing government debt low, and preferably negative, for as many years as it takes to get the ship back on an even keel. 

This so-called “financial repression” endured for a decade or more after the Second World War and it was many years then before the chickens came home to roost in the form of 1970s stagflation. Sustainability of dividend is the key because there are plenty of high-yield “traps” waiting for the unwary investor, but there is no shortage of blue-chips offering reliably high and growing dividend streams.

Finally, writing on the CNBC blog, columnist Ross Westgate revisits all of those "Sell in May and Go Away" predictions that you probably were reading last spring and notes the following:

Since May 1, the FTSE [.FTSE  5888.75    -26.80  (-0.45%)   ] has risen just over 100 points, most of that in the last week providing gains of 1.75 percent In the U.S the S&P 500 [.SPX  1463.39    -2.38  (-0.16%)   ] is up over 60 points or 4.45 percent but the standout has been equities in the poor afflicted euro zone. In the same period the Euro Stoxx 50 [.STOXX50E  2583.14    -11.42  (-0.44%)   ] has risen over 200 points, a near 11 percent return.

Clearly selling was not the best decision, but as Seven's Justin Urquhart Stewart points out, it's worse than that. Because in the May - September period ''not only would you have lost the income, but also incurred the costs of selling and buying back and suffered the further losses of the bid–offer spreads. All in all, a complete waste of time, money and worry.'' 

In other words, while I might be a little cautious near-term, history would suggest that when the world's central banks want you to buy stocks perhaps you should just go along for the ride.