The more uncertain the economic climate feels, the more likely the Fed will continue to delay tapering, writes MoneyShow's Jim Jubak, also of Jubak's Picks, and continue driving bonds and bond proxy stocks up.
With the shutdown/debt ceiling crisis behind us, the stock market is free to worry about a slowdown in US economic growth and to hope for a delay in the Federal Reserve's taper until sometime in 2014.
That's pushing the US market away from growth-sensitive stocks and toward what James Mackintosh of the Financial Times called “bond proxies” on Friday.
That means stocks with safe dividends that won't be cut, even if the economy stumbles.
Thursday's market leaders were telecom stocks (up 1.7%), utilities (up 1.6%), and consumer staples (up 0.8%) on a day when the Standard & Poor's 500 stock index (SPX) climbed just 0.67%.
The worry here, of course, is that a US economy that wasn't growing fast enough for the Fed to begin to withdraw any of it stimulus, even before the shutdown/debt ceiling crisis, will show even slower growth in the fourth quarter because of that crisis. And that the damage will extend into 2014 because we're scheduled to revisit the shutdown and debt ceiling battles in January and February of 2014.
The hope—for bonds themselves and bond proxy stocks—is that uncertainty about economic growth will keep the Fed from beginning to taper off its $85 billion a month in purchases of Treasuries and mortgage-backed assets until January, or maybe even March or April. That kind of delay would continue the post-crisis rally in Treasuries that sent the yield on the 10-year Treasury to 2.59% on Friday, from slightly above 3% in early September. Falling yields make the payouts from bond proxy stocks more valuable. For example, eight of the 12 stocks in my dividend income portfolio were up Friday, as of 2:15 PM New York time. Verizon (VZ), which isn't part of that portfolio, was up 1.57% Friday.
How long this goes on will depend on how long the markets remain convinced that the Fed will delay beginning its taper. The Fed's Open Market Committee, which will make that decision, meets on October 30 and then on December 18. Just about no one believes the Fed will have enough data to decide to begin the taper on October 30, and the betting now is, that the Fed won't taper on December 18 either.
The timing of the Fed's calendar does mean that the markets won't know they're wrong—if they are—until the middle of December. The Fed recognizes this and if it intends to taper in December, you should hear signals loud and strong from the central bank before that, because the last thing the Fed wants is to surprise the financial markets at this point.
My opinion is that we won't hear those taper signals in December.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any company mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.
