Stock markets rose sharply on the Federal Reserve’s latest moves to support the economy, reaching levels not seen since before the recession in the fall of 2007.
But market watchers are divided on whether investors should view the Fed’s latest actions as a green light to buy, or a yellow one to move with caution.
“We will have a low-return, high-volatility environment for a lot longer than we thought,” said Nadia Papagiannis, director of alternative fund research with Morningstar in Chicago. “It will make investing a lot more difficult.”
The Fed is acknowledging the recovery is not where it needs to be three years in and will require extraordinarily low interest rates, at least through 2015.
Investors, however, are cheered that help is being offered.
The Fed’s new open-ended policy of purchasing mortgage-backed securities — about $40 billion a month — is designed to push down long-term interest rates. Economists suggest it will target a 7 percent unemployment rate.
It represents a big shift from previous easings, which were for a fixed term and not tied to the unemployment picture.
“The Fed move has set the stage for the S&P 500 to hit new highs by the start of the year,” predicts Paul Dickey, president of INS Capital Management in Denver.
If so, he suggested investors should be cautious about having too much in bond funds, which could drop sharply in value, and should seriously consider long-out-of-favor foreign equity markets.
“The larger opportunity may exist outside of the United States,” he said.
Monetary easing typically weakens the U.S. dollar and lifts commodity prices, a benefit to natural resource companies. That should also make U.S. exports more attractive, helping domestic manufacturers.
Experts say low mortgage rates should continue to boost the housing market, and by extension homebuilders and other real-estate plays.
People might not like the idea of the Federal Reserve targeting the value of financial assets, but it offers the best hope, said Lou Barnes, a Boulder mortgage banker and close observer of monetary policy.
“The Great Recession crushed household balance sheets, and assets must rise in value for the economy to grow and to survive the inevitable fiscal discipline ahead,” Barnes said in a commentary.
Those who can borrow money at low rates and invest in inflating assets stand to benefit the most, Dickey added.
But that is only a small segment of the population and the Fed actions seem to be offering easier credit to an economy that needs to de-leverage, said Michael Herbst, director of Active Fund Research with Morningstar in Chicago.
While that might boost stock markets in the near term, he questions the longer-term benefit to the country’s economic core.
“We have a consumer-driven economy, and the consumer is broke,” he said Friday during a Denver visit.
Aldo Svaldi: 303-954-1410, asvaldi@denverpost.com or
