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The Fed Gets ‘Transitory,’ and Markets Shrug

The Fed spoke today, and while there was almost zero chance we would see another hike in short-term interest rates, there was still a sense of mystery about how the Federal Open Market Committee (FOMC) statement would read.

Here, I and other market watchers were hoping to see language that acknowledged the slight slowdown of the economy, but that also said any slowing of activity is likely only temporary.

Well, to my literary surprise, the Fed didn’t use the more clichéd term “temporary.”

Instead, it used a much better, yet essentially the same meaning, term… “transitory.”

Here’s the money quote form the FOMC statement:

The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.

So, the Fed did acknowledge the modest loss of economic momentum, but it didn’t make a big deal out of it. And, it also basically put Wall Street on notice that it still plans to continue normalizing interest rates (i.e. hiking interest rates) as the year continues.

More importantly, this Fed statement essentially met Wall Street expectations, and as such the market basically shrugged. There was only minimal movement in the major averages post-FOMC, and as of about 30 minutes after the decision the Dow was up a slight 18 points.

The one potential wildcard in the Fed’s statement had to do with the issue of reducing its balance sheet. Here, I wanted to see if there would be any specifics regarding a change to how the Fed reinvests its principal payments from its holdings of agency debt and agency mortgage-backed securities.

Yet here, again, there were no surprises. Similarly to the stock market, the bond market basically shrugged (yields up only slightly).

For investors, the Fed meeting now being out of the way means it’s time to continue to look at the two biggest drivers of markets today… Washington policy reform and earnings.

The former gained some ground last week, as the Trump tax reform ideas were well received by markets. The latter has been good, too, although last night’s revenue miss by Apple (AAPL) was a slight disappointment.

Still, if we see continued progress on the policy front, as well as a continuation of the solid (albeit not quite stellar) earnings reports, then markets can continue to grind higher.

If you want to find out how my subscribers are riding the current bull market with double-digit-percentage gains, then I invite you to check out my Successful ETF Investing newsletter today!

ETF Talk: Bond Fund Offers Enhanced Stability

By Eagle Staff

As part of our series on bond exchange-traded funds (ETFs), this article highlights a large bond fund, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), that traditionally offers investors more stable returns than many funds that also focus on non-U.S. government bonds.

As its name suggests, the iShares iBoxx $ Investment Grade Corporate Bond ETF invests only in highly rated U.S. corporate bonds. The issuers of these bonds are big, blue-chip U.S. companies, including those in the Dow or the S&P 500 indexes.

Naturally, this focus means that the bond yields are not likely to be as high as investors could find by chasing higher payouts from riskier companies. But the asset value of the LQD bond fund is comparatively more stable. The ticker symbol, LQD, seems to be an appropriate way to convey the liquidity of these assets.

The yield for this fund is about 3.5%, so it pays more than the average U.S. government bond. But LQD is not likely to match the returns that can be pursued from riskier assets during bull market conditions. Still, this fund offers more protection than many others. Safety often is a primary goal of bond investors.

The expense ratio for this fund is 0.15%. It has gained 2.64% over the past 12 months, and net assets total around $31.3 billion. The chart below shows the modest movement in the fund’s price resulting from the decreased demand for bonds in times of market surges.

The top bond issuers of this fund are all household names. Those companies and their weightings in the fund are: Verizon Communications Inc. (VZ), 3.02%; JPMorgan Chase & Co. (JPM), 2.94%; AT&T Inc. (T), 2.81%; Goldman Sachs (GS), 2.70%; and Bank of America Corp. (BAC), 2.50%.

As you might expect from this list, the most heavily represented sectors are banking, consumer non-cyclicals and communications. The fund holds many different bond issues from some of these issuers, resulting in a total of more than 1,750 positions, even though the number of companies involved is less than that.

If you’re looking for a relatively safe income-oriented investment with a little more potential for returns than U.S. government bonds, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) could prove to be of interest to you.

As always, we are happy to answer any of your questions about ETFs, so do not hesitate to send us an email. You just may see your question answered in a future ETF Talk.

Things to Buy With Your Sell-In-May Profits

Life in the equity markets has been very good to investors, especially since the unexpected election of Donald Trump as our 45th president.

The S&P 500 is up more than 12% since Election Day, and many stocks are up far more than that since the “Trump reflation trade” has been in effect.

Now, however, we’re in May, and that means many investors are planning to follow one of Wall Street’s oldest adages: “Sell in May and go away.”

If you are sitting on a whole lot of post-election profits, and you are getting ready to sell in May and go away, the question then becomes … what do you buy with all that money?

Here’s a fun look at some of my favorite things to buy with your sell-in-May profits.

Rejoicing in the Reflation Trade

Rejoice, brothers and sisters… the reflation trade is back!

I channeled my best preacher voice for that line, and when you think about it, I am a preacher of sorts… a preacher for your money’s salvation.

Last week, we heard the good news on the market front, as stocks surged more than 1% Monday, and again on Tuesday.

There were several good reasons for the rise in stocks last week. First, there was the French presidential election, and the reaction to the results of the first round of voting was a collective… Vive la France!

The field now has been narrowed to centrist candidate Emmanuel Macron and Marine Le Pen, leader of the National Front party. Financial markets want Macron, as he doesn’t want to upset the European Union apple cart. And, according to the early polls, Macron holds a two-to-one lead over Le Pen.

Now, given the polls showed Brexit would be voted down, and that Hillary Clinton would be president of the United States, well, forgive me if I don’t have all that much confidence in polls. Still, Wall Street expects a Macron victory, and they are betting on it.

The other two big reasons stocks are up this week are A) Earnings have been very good, and B) The Trump reflation trade is back in business.

We got strong earnings results last week from many industrial bellwethers, including Dow components Caterpillar (CAT), McDonald’s (MCD) and 3M (MMM). We also got great results from many “trader favorite” stocks such as Chipotle Mexican Grill (CMG). For more on CMG, read my quote in U.S. News & World Report.

And last week, markets got what they really want, details on the president’s tax reform plan.

Now, I’ve told you in this publication, and I’ve repeated this incessantly to subscribers of my Successful ETF Investing newsletter since the election, that the only thing that really matters on Wall Street is progress on the Trump agenda… and specifically a reduction in the corporate tax rate from the current 35% to 15%.

Well, we got details on corporate tax reform and a whole lot more from White House chief economic advisor Gary Cohn and Treasury Secretary Steve Mnuchin.

The two Goldman Sachs alums took to the White House briefing room to tell the nation this will be the “biggest tax cut” in U.S. history.

Highlights of the plan include:

  • Cutting the number of income tax brackets from seven to three, with a top rate of 35% and lower rates of 25% and 10%.
  • Eliminating all tax deductions except for the mortgage and charitable contribution deductions.
  • Creating a “one-time tax” on the trillions of dollars held by corporations overseas.
  • Eliminating the estate tax, a.k.a. the “death tax.”
  • Moving to a “territorial” tax system, meaning most or all of the income that businesses earn overseas would not be subject to U.S. taxation.

And finally, the aforementioned cut in the corporate tax rate from 35% to 15%.

We are going to get more on this plan in the days and weeks ahead, and the details will certainly be interesting to uncover. Also, we’ll have to see how this plan is taken by Capitol Hill, as Congress will have to work with the Trump administration to get these proposed reforms into law.

If they can do it, it will be the key step everyone on Wall Street, myself included, has been waiting for, as it will justify the current rich valuation in stocks.

It also will likely allow markets to continue to rejoice in the reflation trade, as markets and the economy will finally go from a potential tax-reduction stimulus to an actual tax-reduction stimulus.

And, short of a completely eliminating all forms of government confiscation of your money (that’s the libertarian in me coming out), the first step in getting the economy and the markets supercharged into growth is to get some tax reform in place.

Stagecoach Wisdom 

Aw, and this one here was taken overseas

In the middle of hell, in 1943

In the wintertime, you can almost see my breath

That was my tail gunner ole Johnny McGee

He was a high school teacher from New Orleans

And he had my back, right through the day we left

And if it looks like we were scared to death,

Like a couple of kids just tryin’ to save each other,

You should have seen it in color…

— Jamey Johnson, “In Color”

Over the weekend, I attended the Stagecoach country music festival in Indio, Calif. The three-day event featured some of the best country artists today, including one of my favorites, Jamey Johnson. In his song “In Color,” Johnson writes about old pictures and old memories, including the hardest struggles and the greatest joys in life. Country music is a celebration of our uniquely American experience, and in many country songs there’s a lot of wisdom about what really matters. So, if you are looking for insights into the soul of the real America, check out Jamey Johnson and other country artists like him.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Jim.

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