Monday, 23 September 2013

More good news on shipping, more thoughts on the "no taper" decision, a short-term warning sign

It seems it’s not just seaborne freight that is sending positive signals. The Association of American Railroads (AAR) ... reported increased total U.S. rail traffic for the month of August 2013, with intermodal setting a new record and carload volume increasing overall compared with August 2012.

Not surprisingly, railroad stocks have also been performing pretty well of late…

…while bellwether global transportation companies UPS and FedEx are also trading at record highs. These observations also augur well for continued recovery in the global economy.

Regarding the Fed and its influence on markets: I stumbled upon a great article at Motley Fool which had a fascinating chart that I have inserted below. The chart shows cumulative returns on the S&P500 from 1994 to 2011 with and without the 24 hour period following FOMC announcements. This chart shows two things:

1)      Most of the market’s gain from 1994 to 2011 came within 24 hours of Fed policy meetings (I found the impact staggering!); and

2)      The Fed has been influencing markets since long before Jon Hilsenrath became a household name (i.e. the Fed’s market influence is NOT some new, post-crisis paradigm)!

There has been much hand-wringing over what would happen to the equity market once the Fed starts tightening (or even reduces the amount of easing on offer via tapering). Remember, the Fed has a mandate to control inflation and support employment. Bernanke made it clear last week that the Fed will continue to provide accommodation until the economy gets stronger. And a stronger economy might be good for equities…the last time the fed tightened monetary policy, from 2004-2006, US equities rose approx. 40%. And if the economy doesn’t improve in line with Fed expectations, the Fed will keep stimulating…which might also be good for equities.

This does not mean things go up in a straight line. Witness Friday’s swoon, attributed to comments from Fed President Bullard regarding the possibility of tapering in October. However, the very notion that the Fed will at some point throw its hands in the air, yank stimulus and let the economy tank is not only unlikely, it is clearly against its mandate. Again, today is not the time to allocate (or not!) investment capital based on worries over the Fed’s exit strategy.

If I sound positive it’s because I am, structurally. Short term I am a little more cautious. In a previous note I mentioned how two of the sectors that lead the market higher – homebuilders and financials – looked as though they had broken down. While both sectors have recovered somewhat since then, neither has confirmed the new all-time highs seen in the S&P500 (see chart below). Non-confirmations like this often serve as a prelude to a broader pullback (a.k.a. “volatility” in investment banking parlance). Such a pullback is likely to be more technical in nature, although some scary narrative (debt ceiling fiasco round 3 anyone?) will almost certainly be applied to it. I would be inclined to treat any such event as a buying opportunity.

S&P500 (white line, making new highs), Financials ETF (orange line, not making new highs), Homebuilders ETF (red line, not making new highs):

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