What You Should Do While the Fed Hedges Its Bets

By George Leong

Federal Reserve Chairman Ben Bernanke testified to the House Financial Services Committee last Wednesday, and there was nothing surprising in what he said. He stated that the money printing will continue until there’s improvement in the economic recovery and the jobs market.

Bernanke again repeated that the Federal Reserve might begin to rein in the bond-buying stimulus later this year, but no concrete date was given as the move would depend on some key factors.

What this means is that the trading will continue to be driven by economic headlines. While there’s a sense among many that the economy will strengthen, there are some traders who would be fine with soft economic data—because that would delay the inevitable bond stimulus cuts.

“And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around mid-year,” said Bernanke in his testimony. (Source: “Semiannual Monetary Policy Report to the Congress: Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.,” Board of Governors of the Federal Reserve System web site, July 17, 2013.)

Bernanke also commented on the possibility of “unanticipated shocks,” including the stalling in the global economy and its impact on the country’s economic growth.

The Federal Reserve tried to reassure the market that the easy monetary policy will continue for the “foreseeable future” given the high unemployment rate and benign inflation.

But I doubt that jobs growth will accelerate fast enough for that to happen, since the recent first-quarter gross domestic product (GDP) grew at a muted 1.8%. So, it looks like the stock market will continue to be the area of choice for most investors.

It’s also interesting that the Federal Reserve has not set an amount that will be cut in the initial tranche of the bond cutting. But that’s not a surprise since it will depend, in large part, on the key factors set by the Federal Reserve. Of course, the reluctance to earmark a dollar figure could require the Federal Reserve to open a larger cut if the economy takes off and the jobs market expands more quickly than expected.

What the Federal Reserve has done is create an investment environment where volatile swings could be seen depending on the headlines and where the market is anxiously hanging on Bernanke’s each and every word. But at the end of the day, I still believe that stocks will continue to outperform bonds.

And because of the stock market’s performance, you should continue to ride the advance. But right now, the main focus will be on corporate earnings—and if corporate America fails to deliver, we could see the stock market hesitate.

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