The Can Gets Kicked Again
Every investor knows that the U.S. has some serious economic problems. The government has way too much debt, the budget deficit is huge, economic growth is anemic, and it has been 30 years since the employment participation rate was as low it is now. Yet the stock market is on fire with the S&P 500 and Dow Jones Industrial Average closing in on all-time highs.
The rally in stocks is partly being fueled by the Federal Reserve, which is doing everything it can to provide liquidity and keep interest rates low. Perhaps that’s putting it too mildly. The truth is that the economy is drowning in liquidity, yet the Fed continues to buy up bonds as quickly as the Treasury can issue them. The Fed is also buying mortgage-backed securities. These actions, in addition to the the low fed funds rate, are keeping just about all interest rates low, which is exactly what the Fed wants. Low rates make safer investments undesirable. They force investors to consider riskier investments such as stocks. They also make current dividend yields extremely attractive.
The other factor driving stocks higher is Washington. Unfortunately, politicians have learned that they don’t actually have to do anything. In fact, they have learned that they can simply push off important decisions. They did it again today by raising the debt ceiling for another four months. Whenever politicians delay an important decision, investors breathe a sigh of relief and stocks move higher. The fiscal cliff, after all, turned out to be a joke. Nothing meaningful was resolved.
While it is true that some companies, such as IBM and Google, are announcing encouraging results, most companies are not really doing very well. Yes, they are beating expectations; but for the most part year-over-year revenue and earnings growth is not strong.
I can’t help but worry that such government actions (or inactions to be more exact) are setting us up for another sell-off. While I am not yet ready to take all my money off the table, I do believe it makes sense to use these rallies to pare back on certain positions.
Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.
Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.
Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).