In a move that surprised most market participants, the Federal Reserve Board recently voted 9-1 to maintain its $85 billion asset purchase program.
After signaling since May that the Fed would soon begin to "taper" its gigantic purchases of treasury bonds and mortgages, Chairman Ben Bernanke cited sluggish growth in the U.S. economy, an elevated unemployment rate and weaker housing data as the rationale behind the decision. Rather than act preemptively while economic data is mixed, the Fed chose to stay the course and monitor incoming information on economic and financial developments prior to a change in its stated policy.
While the aggressive stance taken by the Federal Reserve has unequivocally supported the value of financial assets, its impact on economic growth has been partially muted by the continued uncertainty over the future direction of fiscal policy and the lingering impact of the sequester. Markets hate uncertainty and in the absence of real progress in addressing structural issues in the United States, Europe, China and the emerging markets, we expect market volatility and headline risk to remain high.
From a personal investment standpoint, the Fed's data-dependent policy stance and the maintenance of its zero interest rate policy has three important implications:
- Stocks remain attractive. We continue to like companies with the capacity to increase dividends over time. In addition, cash held on corporate balance sheets is at record levels. Cash that will ultimately be deployed to launch share buybacks, increase dividend payments and finance strategic acquisitions, all of which are supportive to equity prices.
- Beware interest rate risk. The Fed's decision to stay the course (for now) offered a much needed reprieve to fixed income investors. With interest rates near generational lows, now may be an opportune time to reduce interest rate risk and consider "bond substitutes" such as bank loans, preferred stocks and convertible bonds.
- Capitalize on market volatility. The U.S. equity market has advanced more than 140 percent from the 2009 lows. A balanced portfolio in line with an investor's risk tolerance provides the opportunity to participate on the upside and the flexibility to add to attractive asset classes on an opportunistic basis.
David Spano is chief executive officer and Derek Felske is chief investment officer at Annex Wealth Management LLC in Elm Grove.
