Fed Policies, GOP Victory Put Markets In 'Sweet Spot': Pros
Federal Reserve pump-priming and likely policy changes coming to Washington have market pros scurrying into bullish positions for the days ahead.
The Fed's planned injection of at least $600 billioninto the system through its money-printing Treasury-buying program has increased expectations for a prolonged risk-on trade, while Republican gains in the midterm elections have spurred hopes that Washington will stay out of Wall Street's way.
"This is a sweet spot politically that we don't recognize, we're just kind of blind to," Ken Fisher, founder of Fisher Investments, said in a CNBC interview. "We move from high political aversion where everybody's' chittering and hostile about all the things we were hostile about this year, down to a point where next year nothing's going to happen except for baby-kissing, and that's the low point of political risk aversion."
Fisher pointed out that since 1939 stocks have never been negative in the third year of a presidency. He said that the year following a mid-term coincides strongly with the ending of risk aversion as investors get a clearer view of the regulatory climate.
Similarly, the Fed's policies are convincing more and more market participants that the central bank's policies, though posing dangers over the long run, are at least supportive for the near term to stock prices.
In a research note, Goldman Sachs chief economist Jan Hatzius said the firm's financial conditions index is indicating easing conditions and the Fed's policy "has gotten off to a very good start."
He noted that "lower interest rates, higher stock prices, and a weaker dollar is basically indistinguishable from what one would expect in the runup to a conventional monetary easing, suggesting that most of it has been the Fed's doing."
So at a time when a lot of conventional market maxims have proven unreliable—"as goes January, so goes the year" comes to mind, along with others—"don't fight the Fed" nevertheless seems strongly in vogue.
"Fighting this trend is a fool's game," hedge fund manager and The Gartman Letter author Dennis Gartman wrote Monday morning, even while calling the Fed's posture "heinous and inflationary and ill-advised."
"The Fed has a great good deal more 'margin money' than we have and to take the Fed on at this point shall cost not only real capital, but the expenditure of mental capital shall be exhausting," he said in predicting the Standard & Poor's 500 could be on its way to approaching an all-time high around 1,500.
Equity research firm TrimTabs changed its market position from "cautiously bullish" to "fully bullish" on the grounds that "the Fed is determined to manipulate stock prices higher and is blowing up a multi-trillion dollar bubble."
The firm's analysts note "we are concerned about the long-term effects of this intervention on interest rates and inflation. Nevertheless, the Fed's money printing is supportive for stock prices in the short term."
While the Fed's easing and the electoral changes have spiked enthusiasm for stocks—even though the market was lower Monday—others are seeing fundamental changes as well.
Ian Shepherdson, chief US economist at High Frequency Economics, said in a New York Times interview that commercial and industrial bank lending is improving slowly, which he thinks could cure a variety of economic ills including unemployment.
"My overwhelming condition for things to get better in the small-business sector is credit, so the positive data are a hugely exciting development," he said. "I don't think we will see all these gaps close by December, but over the next 12 months I think we will see a transition out of a sluggish 2 percent economy to a real, properly growing recovery."
Such upward momentum would spread through the entire economy, not just stocks, Citigroup economist Steven C. Wieting said in a research note.
"Political cohesion and even new uncertainties on the level of discretionary spending present obstacles," Wieting wrote. "But further clarity on policy in the coming month or so would more likely than not suggest upward revisions to our 2011 outlook. Real businesses, not just financial markets, should take increasing comfort."