A week and a half ago, the Federal Reserve (the Fed) announced a third series of measures for quantitative easing or “QE3”.
There are 3 components to the Fed's plan:
- Continue the Fed's program to replace its short-term Treasuries with longer-term Treasuries through the end of the year; the intent being to hold down long term interest rates.
- Purchase $40 billion each month in agency mortgage-backed securities (MBS) to help the housing industry recover and encourage better employment numbers in the US economy.
- Keep interest rates at "exceptionally low levels" through 2015.
Many commentators are referring to the latest movement as “quantitative easing unlimited”. A number of observers have not been complimentary of the Fed’s actions and see them as a manipulation of interest rates. They further feel these efforts may have unintended consequences and could lead to inflation. Gold, a popular inflation hedge, moved higher on the news. Another reaction has been a continuing rally in the stock market and a long term gain of over 100% since the lows of March 2009. From that perspective the Fed’s decisions have had a positive effect. Absent these efforts of the Fed, one has to consider the alternative scenarios:
- Not act and allow a quick deflationary bust to clean out all the over-leveraged investments quickly or;
- Create enough inflation to make the majority of home-owners "whole."
The first option is obviously deflationary. This is what the Fed is fighting and would mostly benefit those with fully paid real assets and investable cash on the side lines. The majority of Americans would likely experience an economy much like the Great Depression where invested assets would be lost and jobs eliminated. The second option is obviously inflationary and would help debtors but hurt individuals on fixed incomes/pensions.
There are no easy answers, and with little leadership by Congress, the Fed is doing what it can with the tools they have available to avoid both #1 and #2 until Congress gets serious about implementing fiscal solutions that will help stabilize and lead to future sustained growth in the economy.
At SYM, for investment purposes, we have to work with the cards that are dealt us and not get too focused on whether the Fed actions constitute good or bad policy. The market has benefitted from a sustained rally this summer so we find ourselves with some significant gains in a number of our equity funds. Prudence argues that we need to harvest some of these gains. This week we will be selling half of our position in our best performing large cap fund. We will be reinvesting the proceeds from this sale into a more conservative large cap fund which focuses on companies that consistently increase their dividend yield. We chose this fund because it affords us additional defensive characteristics while still allowing us to remain fully committed to the potential market gains in 2013; whether induced by the Fed actions or by more traditional economic growth, or both. This is a modest realignment, but one we believe fits the circumstances. We will continue to monitor the overall situation and adjust our portfolios to meet the rapidly changing investment landscape.
Should you have any questions or desire additional information, please contact your advisor at SYM.
Past results are not necessarily indicative of future results. Keep in mind, investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Please seek your own professional advisor who can properly review your particular circumstances. Statements and opinions herein found are derived from sources believed to be reliable, but are not guaranteed to be accurate.