My sympathy goes out to Janet Yellen. It must be hard to be that smart and yet stay on an even keel during periodic trips to Congress, when you are expected to perform in a way that pleases the pols and answer a series of frequently inane questions. Yesterday was a prime example, as one of the finest economic minds of recent times was asked to be a weather girl.
Actually, to be fair to the Senators, that focus on Dr. Yellen’s weather update came more from the likes of me than it did from them. Traders and the media were the weather obsessed ones. I find it amazing that the market was supposedly holding its collective breath, waiting for confirmation that what they had been through over the last few months was real.
A simple glance out of the window at any time could have done that. If you believe most of the analysis this morning, the stock market rallied past previous highs because Yellen confirmed that the weather had been bad. I find that hard to believe.
There was, I am sure, relief that the Fed Chair didn’t detail some worrying underlying problem that everybody else had missed but, it seemed to me, there was nothing momentous enough in her words to drive a rally. She simply stated the obvious; the weather has been bad and that has clouded the issue too much to make any changes in policy desirable. There were a few things of interest to policy wonks like me regarding GSEs and the Fed’s attitude to unemployment, but really nothing new.
I have said it many times before and I am sure I will say it many times more; market dynamics and overall trader sentiment going into any piece of news or event are the main drivers of the reaction. The reaction tells us more about what the general mood of traders is than about what was actually said. Most interestingly to me, on that basis yesterday confirmed that the topsy-turvy world we have been living in for the last couple of years is gone, once and for all.
It wasn’t that long ago that any hint from the Fed that QE would be cut back resulted in a sell-off. Traders believed that the market, if not necessarily the economy, was dependent on the Fed’s liquidity, and any threat of that going away caused panic. Yesterday’s positive reaction to the news that reductions in the bond buying program would be continued tells us that they no longer see it that way.
I and some other commentators spent most of January reassuring investors that what we saw in January was a correction, not a collapse. I’m glad to see that the market agrees and that we are back to a situation where the underlying strength of the economy is being recognized. The recovery may not be as robust as many would like, but it is still a recovery, and as a result we are back to the reassuring world where good news is good and bad news is bad... phew!
So, what does all of this mean for the market going forward? In her new role as weather girl I’m sure Dr. Yellen would tell us that long range forecasting is, by nature, imprecise, but still, I’ll give it a go. I started the year more positive than most and yesterday’s events make me a little more confident in that view.
History tells us that at some point or points this year the market will move lower. Nothing ever goes straight up, but the bears that spend the whole year looking for the dip will probably miss out. There is little point watching the market appreciate 15% while waiting for a 10% correction.
What has changed is that I would probably be less inclined to pick favorites and take a more general approach to investing. Keeping a portion of one’s portfolio aside for trading is fun and can boost overall returns significantly, but the bulk of your money will probably do fine in a more general investment, such as the SPDR S&P 500 ETF (SPY).
It is in some ways hard to imagine 20% or more appreciation this year after a huge 2013, but so far the market has indicated that that is more likely than any collapse. If I see 20 or 25% appreciation I’d probably look to take some profit, but for now things look good. We have shrugged off real problems in some emerging markets and reacted positively to maintaining the status quo with regard to Fed policy. Both of these things indicate an underlying confidence that bodes well for the rest of the year.