By Doug Fabian
It’s often said that the key to a successful business is to provide customers what they want. Well, perhaps that’s the mindset of Federal Reserve Chairman Ben Bernanke, as he keeps giving the bulls what they want.
Today, the Fed chief told Wall Street what most everyone had expected, namely that the central bank will continue its easy-money policies until the labor markets improve and until the economic recovery takes firm hold.
The initial market reaction to Bernanke’s testimony before Congress today was a 150-point spike in the Dow, but that jump soon settled down to just a very modest gain midway through the session.
The trepidation here on the part of traders was due to hints dropped by Bernanke at the hearing that the Fed actually would consider “tapering” its bond buying program and/or possibly raising interest rates over the course of the central bank’s next several meetings.
The suggestion of a scaling bank of the existing quantitative easing measures, or QE, caused traders to dump about 100 Dow points in just a few minutes. Markets then bounced around a bit, as traders tried to digest and interpret what the Fed will do next.
This whole episode underscores what I’ve been telling you for some time now, and that is this market is almost completely Fed driven, meaning that the gains we are seeing in the stock market, and largely in the bond markets, are the result of the distortions created by the central bank.
Although there are small signs of improvement in the labor markets and housing, there is no real strength in gross domestic product (GDP) growth or in the economy at large. Certainly, there’s not enough improvement in corporate earnings or GDP to justify a near-30% run higher in the S&P 500 during the past 12 months.
Once again, I maintain my thesis that this market is a Fed-induced chimera that is going to end badly for those not prepared to deal with economic reality.
So, how do you deal with this reality? Well, that’s why I write my Successful Investing newsletter each month. For more than 30 years, we’ve been helping investors navigate all sorts of market conditions, and this latest Fed-dominated environment is no different.
The Johnson & Johnson Indicator
One of the ways you can tell that the Fed is the dominant force in the market right now is to see which sectors, and which bellwether companies, have seen atypical distortions in price. One such company is consumer products giant Johnson & Johnson (JNJ).
This company has had decent earnings, but not stellar revenue or earnings growth. Moreover, Johnson & Johnson doesn’t have any new groundbreaking products or drug therapy. So, why has the stock jumped nearly 40% during the past 12 months?
The answer is that investors are turning to big consumer stocks like JNJ in search of a decent yield. (JNJ pays dividends that amount to about a 3% yield.) Investors also are buying stocks that are likely to hold up well once Ben Bernanke takes his monetary easing ball and goes home. In other words, investors are buying defensive stocks that make products everyone will buy, regardless of market conditions, and that caution is causing the price of otherwise low-volatility stocks to act like they were tech stocks in the 1990s.
This JNJ indicator is something to keep a close watch on, as it will help tell us how investors are reacting to the biggest factor in the market right now -- the Federal Reserve’s easy-money policies.
A Little Thought on Luck
“Shallow men believe in luck. Strong men believe in cause and effect.” --Ralph Waldo Emerson
Have you ever heard someone describe a successful person as just “lucky?” Of course, we all have. While I am not saying there is no such thing as luck, most of the time success is achieved through hard work. In other words, success is a matter of cause and effect, not simply luck. Keep this reality in mind the next time you pine for more success, or the next time you see someone who has achieved anything worthwhile.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.
To read my e-letter from last week’s Eagle Daily Investor, please click here.