People are viewing the end of stimulus as a sunset. "My, what a wonderful day we've had," they say.
What they should be doing is investing for tomorrow's dawn – the turmoil we're seeing now as part of Yellen's arrival is actually par for the course.
It's also a great time to lock your sights on four companies that will lead the way when the smoke clears…
The Federal Reserve Transition Is Creating Bargains
Bloomberg data, for example, shows that U.S. markets have fallen an average of 2.6% for the three months immediately following a Fed handover. We're down 3.6% (as of last Friday's close) from the S&P 500 peak set on Jan. 15 of 1,848.33, so it would appear that the pullback simply began ahead of time.
When Paul Volker took over in August of 1979, the markets dropped 4.6%. That was nothing compared to the 26.5% wallop they experienced in August of 1987 when Alan Greenspan took office, according to USA Today.
Many investors are worried that things will go from bad to worse because of the taper from $85 billion a month to $75 billion a month and now down to $65 billion a month…
I can't say I disagree, at least not in principle anyway. But, eventually this will all blow over.
It won't be pretty, and what happens in the interim will undoubtedly test your patience. But it will blow over. Practically speaking, the Fed has succeeded in doing something this time around that has never been done in the history of mankind in that they've inflated everything.
What most people don't realize is that the markets have a funny way of adapting to stress. They also have a funny way of showing what happens when they do.
Most investors are surprised to learn that the vast majority of the time, turmoil like we're experiencing at the moment actually results in new liquidity and positive – as in higher – prices. There's clearly an upward bias at work.
Many investors find this hard to accept, even when looking right at the data. I know – I'm one of 'em. But at the end of the day, the data is the data.
To me this is a lot like being told to eat your broccoli because it's good for you – you can't see the immediate benefits even though you know research supports the assertion.
For instance, FactSet/Piper Jaffray data shows that the S&P 500 has returned an average of 5.9%, with some 70% of equities in the benchmark index reflecting higher prices 12 months after a Fed handover.
Personally, I think that's conservative.
These Are the Markets for the Next 140 Years
My expectations are for 8% to 12% growth this time around. Despite the litany of more cautious earnings statements we've seen so far this earnings season, companies continue to boost profitability. Generally speaking, they're cash flush and increasingly competitive.
As I shared with Money Map Report subscribers Monday, U.S. capital spending is going to increase by as much as 6.7%, according to UBS AG, which syncs with my expectations for 5% to 8% and spending north of the $2 trillion we saw in 2013.
It's not by coincidence that these companies are sitting on record levels of cash and short-term investments – some $3.6 trillion, according to Bloomberg. Nor is it random that 79% of the S&P 500 companies already reporting Q4 earnings have beaten estimates.
That said, there's no magic pill. I don't agree with the rosy 3% GDP growth that Moody's Chief Economist Mark Zindi has said he sees coming. Nor do I think we're going to see the robust job growth that many economists see coming.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.