The Federal Reserve Open Market Committee or FOMC came down from its financial Mt. Olympus to deliver a decision on monetary policy. The market was as I predicted flattish, up till then. The headline decision was to decrease its monthly purchases of bonds by $10 billion to $75 billion. That is what was referred to as tapering. The immediate Pavlovian reaction was to sell stocks. That however was a major mistake because the FOMC had a second message to the market. That message was that short term rates were going to be maintained at a range of 0 – ¼% for the foreseeable future. The second part of the FOMC statement was met with intensive buying, first reversing the aforementioned selling and then rallying to all-time highs for the Dow Jones Industrials (DJI) and S&P 500 (SPX).
The bears were poorly positioned, as they have been all year. The recent mild pullback, which was at the closer end of my anticipated 2 – 4% range, gave them hope that a major correction was taking place and all they needed to make that happen was FOMC tapering. Hope is not an investment strategy. The smart money saw tapering as a reaction to improving economic conditions. The multiplier effect of better economic growth will offset the negative impact, if there is any at all, from tapering. The mistake on the part of the bears was that they put too much emphasis on Quantitative Easing or QE upon the market rally. While that might have been a contributing factor, it was a small one. Too often, the bears think in a binary way. Yesterday, they were scrambling to cover their shorts as their year went from the frying pan into the fire.
After a moonshot like yesterday where the SPX rose 1.66% and the DJI rose 1.84%, I would not expect follow through. Rather, a day of consolidating the prior session’s gain should be what the doctor ordered. I would note that the impact of yesterday’s FOMC announcement was a rush to buy dividend oriented stocks which have been forsaken ever since the tapering rumors began to circulate. Now that tapering mania is over, expect those stocks to begin to perform better. At LakeView Asset Management we offer a Low Volatility / High Dividend Portfolio which has attracted client interest.
In stock news, Facebook (FB) shareholders are selling stock in a massive secondary offering. The reason is that insiders have to raise cash to pay for taxes. Hershey (HSY) is purchasing a Chinese confectionary company. How do you say kisses in Mandarin? Darden Restaurants (DRI) is going to shed itself of its troublesome Red Lobster unit via sale or spinoff. Nike (NKE) will report its quarterly results after the market closes. Analysts’ consensus estimates expect Nike to earn 58 cents on revenues of $6.44 billion. In the year ago quarter the shoe and apparel maker earned 57 cents on revenues of $5.96 billion.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long GOOG — although positions can change at any time.
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. A subscription is included with a paid Platinum Membership to Wall Street All-Stars or an individual subscription to the newsletter which can be ordered at www.restaurantstox.com
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