On the Wings of a Snow White Dove

Posted by on Jun 23, 2014

This song title seemed to me to be a good way to define why the market rose this week. Given her hair color and pronouncements this past week as to the Fed’s planned intentions, I think this title applies to Janet Yellen. While the hair color is obvious, the dove part refers to her inclination to keep interest rates low in order to ensure the economy will continue to improve.

Her comments helped both the Dow and S&P500 each closed Friday at new all-time highs, putting the S&P up over 6% so far this year. Not bad after our flat first quarter.

Simply because we’ve been repeatedly making these new highs, more than a few folks are suggesting that we’re topping and the dreaded downward move “must be” imminent. While a correction of five to twenty percent can happen at any time, that’s not the same as a change in overall trend. In my opinion, the monthly Index of Leading Economic Indicators from the Conference Board is a lot more predictive of market and economic trends. And that Index, I’m happy to report, continues to remain nicely positive.

It’s my experience that markets can’t be defined by technical charts, calendars or clocks. For us to be near a real top, seems to me we need to have moved well past the market skepticism that remains well-elevated in spite of more than 5 years of positive results…

Recap of the week

On Tuesday, the Bureau of Labor Statistics had announced that the Consumer Price Index (CPI), measuring inflation at our level, posted a jump in May that was the largest monthly increase in 15 months. Perhaps more importantly, the core CPI – which excludes food and energy prices since they are subject to many short-term changes – rose by the most since 2009.

The traders had anticipated some shortening of the time when the Fed would raise rates due to this CPI report. Not only did Miz Yellen – and the Board – not respond, she dismissed the report as “noise” and reiterated that the Bank would maintain its accommodative monetary policy for a while.

The more mechanical reason for the market’s rise on Wednesday and Friday, with a bit of profit-taking on Thursday, was because traders were somewhat surprised by the lack of noticeable response to the CPI report. So, they covered bearish positions and took on more positive ones.

What does the CPI rise mean now?

Well, it appears that the acceleration in inflation that’s been a goal for some time is here. We need some inflation – some being the key word. It allows the Fed to continue the monetary policy and does much to reduce the chance of price declines that stymie economic growth.

The report does not mean that runaway inflation is around the corner. While the monthly rise was the biggest since 2009, it’s still relatively small. I believe what has happened is that the trend of disinflation in which we’ve been operating for some time is over. It means that the rate of inflation isn’t, and won’t be, falling anymore. It’s just now moving into the range the Fed has maintained since Mr. Bernanke was the driver.

Investing in the transition

The transition I refer to is that from dis- into more in- flationary. Generally, as we see the overall economy improve, sectors such as (alphabetically) the consumer discretionary, energy, financials, industrials, as well as the techs should benefit.

If could be also be beneficial, in anticipation of rising inflation rates, to begin taking positions in those areas which have done well in similar previous periods. Companies that have seen share price growth in inflationary periods include many of the asset-based firms. Those in the oil and natural gas fields, as well as many of the real estate investment trusts, are good examples. Farmland has seen large gains in the past. And those companies in the timber business with their renewable resources providing current and future production are also attractive.

Those kinds of stocks that have tended not to do well in periods of rising inflation – and the rising interest rates that have typically come with them – would be in the telecom and utility sectors. Current high-yield stocks and most bonds are also subject to downward price movement in such investing environments.


According to an estimate from FactSet last week, S&P500 earnings during this soon to end quarter are expected to have grown by 5.4%, with nine of the ten S&P sectors projecting higher growth. So, looks as if we still have a good foundation for more share price improvement.

I’m not intending to create near-term concern with this note. What I’m doing is, providing my opinion about a current situation.  You can assess your situation to best decide with your advisor as to how to deal with changes now and not have to do it under pressure.

I remain very positive on the overall market, US and global. Just think of this notice of coming change in the market as advice similar to that from Harvey Mackay in his book in the 90s – Dig Your Well Before You’re Thirsty…




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