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VOL. 128 | NO. 251 | Friday, December 27, 2013

David Waddell

What Does the Fed Say?

By David Waddell

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Ben Bernanke announced a tapering of the Federal Reserve’s asset purchase program from $85 billion to $75 billion at his final FOMC meeting last week, and contrary to pundit fears, the Dow Jones Industrial Average threw him a going away celebration by rallying to new highs. What he said:

On the economy: The economy is well enough that we can reduce our emergency support measures.

On the policy change: True, we may be buying fewer bonds … but we will still be buying a lot!

On the policy outlook: We can continue, stop or reverse our bond buying any time we want. So do not take this purchase reduction as any indication of what we will do in the future.

On the Fed funds rate: Relax; short-term interest rates will be at zero for a LONG time.

The Fed’s confidence in the economy, its long-term commitment to low long-term rates, and its flexible attitude toward the longer-term bond purchase program provided something for everyone! This was a master stroke from perhaps the best Fed chairman in U.S. history. Thank you, Mr. Bernanke, for rising to meet the greatest financial challenge our country has experienced in a hundred years. At the end of your tenure, the financial stress index sits near all-time lows, and stock market indices sit at all-time highs. Well done, Helicopter Ben!

We Must Have Been Nice
Last Friday, the U.S. government released their final revised third-quarter GDP report. The U.S. economy grew 4.1 percent in the third quarter on the back of much stronger than expected consumer spending. As we noted in our last column, weak consumer numbers drew into question the Fed’s willingness to taper bond purchases. With most recent U.S. consumer spending gathering momentum and surprising to the upside, the taper decision seems justified. Furthermore, business investment spending has ticked higher as well, suggesting growing corporate confidence in this economic recovery. This structural momentum will likely carry into 2014. Should the Fed continue to reduce bond purchases to offset a quickening economic pace, markets may continue to respond positively. Also, higher interest rates will impact corporate earnings with a lag due to the refinancing cycle, while increased economic demand should impact corporate revenues more immediately. This “time arbitrage” should benefit corporate earnings, bolstering earnings expectations for 2014. Recall that earnings growth for 2012 was essentially zero, 2013 should approximate growth of 11 percent, and 2014 estimates call for growth of 14 percent. This accelerating pattern explains the positive bias of the markets and justifies the Santa Claus rally we expected.

Bottom Line: Concerns about the “taper” were ameliorated by the Fed offsetting its scaled-back purchase plan with projected confidence in the economy and a stern commitment to continued stimulus as insurance. Recent data indicates that the economy shows signs of a quickening pace heading into 2014. Earnings estimates for 2014 grow more achievable with every passing upside economic data surprise. Lastly, in this humble analyst’s opinion, Ben Bernanke flat-out rocked as Fed chairman!

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.

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